RBNZ cuts OCR to 2.5%, softens wording about further cuts; kiwi jumps

Reserve Bank Governor Graeme Wheeler cut the official cash rate a quarter-point, softening his language about the potential for further rate cuts while saying the strength in the kiwi dollar was "unhelpful". The currency jumped after the statement.

"Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range," Wheeler said in Wellington. "We expect to achieve this at current interest rate settings, although the bank will reduce rates in circumstances warrant."

A month ago, Wheeler said some further reduction in the OCR "seems likely".

Persistently low inflation and a higher New Zealand dollar than the Reserve Bank envisaged stoked economists' expectations for a rate cut. Wheeler left the benchmark rate on hold at his last review, while saying he was likely to cut again to encourage inflation back towards the mid-point of the 1-percent-to-3-percent target band. He said the currency's recent bounce back from a decline through the start of the year was "unhelpful and further depreciation would be appropriate in order to support sustainable growth."

But the market's initial reaction delivered more kiwi dollar strength. The New Zealand dollar jumped more than 1 US cent following the announcement. The kiwi was recently trading at 67.47 US cents, from 66.36 cents immediately before the 9am announcement.

"The RBNZ does not intend to cut rates further on the back of its current economic forecasts," said Jane Turner, senior economist at ASB, said in a note after the statement was released. "The RBNZ retains a very mild, data dependent easing bias."

The central bank said there were several risks hanging over its outlook, including the prospect of global dairy prices remaining lower for longer, the prospect of an El Nino-related drought crimping primary production next year, strong inbound net migration staying higher for longer, and households ramping up consumption on the back of gains in rising property values.

The central bank kept its projected track for the 90-day bank bill rate, often seen as a proxy for the OCR, largely unchanged, with the rate expected to fall to 2.6 percent by September next year from 3 percent in the September quarter of this year.

It sees a slower pick-up in inflation over the forecast horizon,with the consumers price index seen rising to 1.2 percent on an annual basis in the March quarter next year, but taking until December 2017 before it hits the bank's percent target, something it had previously anticipated occurring in September of next year.

"The inflation rate is expected to move inside the target range fro early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices," Wheeler said.

The bank embarked on a loosening of policy in response to a slump in global dairy prices, which weigh on national incomes as the country's biggest export commodity. Prices of dairy products are higher than where they were at the time of the September MPS, although are still short of the US$3,000 a tonne Fonterra Cooperative Group has said is needed to support its current forecast for the 2015/16 season of $4.60 per kilogram of milk solids.

The rebound in dairy prices has quelled some mid-year concerns among businesses, who grew increasingly pessimistic about the local outlook, while a weaker currency has stoked tourism, and manufacturing and services activity has remained robust.

The central bank expects gross domestic product will expand at a faster pace next year, with greater activity in 2017 as residential property investment exceeds earlier predictions.

Wheeler said the Auckland housing market, where rapid gains in prices were seen as potentially stressing the broader financial system, was showing early signs of slowing down since government and central bank policies had been imposed to quell some of the demand, though strong inbound migration and low mortgage rates were expected to keep stoking house price inflation in the near-term.

(BusinessDesk)