RBNZ cuts OCR by 25 bps to new record low, likely to keep for some time

The Reserve Bank of New Zealand lowered its Official Cash Rate today by 25 basis points to 1.75 percent, a new record low. It appears that the central bank is expected to keep the key rate at this level for some time now.

In its monetary policy statement, the central bank stated that the monetary policy would continue to be accommodative. It noted that the current forecasts and assumptions show that the policy settings, including the rate cut seen today, would witness growth solid enough to “have inflation settle near the middle of the target range”. The central bank also said that several uncertainties continue, especially regarding the international outlook and that policy might be required to adjust accordingly.

According to a Westpac research note, the central bank’s statement indicates a shift to a much neutral stance. However, this does not signify that the door for additional rate cuts is completely closed. The statement also showed that the central bank acknowledged the uncertainty surrounding the global outlook after the unexpected result of the U.S. election yesterday.

Reflecting such uncertainties, the New Zealand central bank’s forecasts show the official cash rate at 1.7 percent, noted Westpac. This implies that the RBNZ still sees some small likelihood of an additional easing. But this does not show any solid commitment in easing the rate.

According to Westpac, the OCR is expected to stay on hold at 1.75 percent for a longer period, while inflation is likely to accelerate as certain temporary factors fall out as the economy bolsters. However, inflation returning to the target midpoint is expected to be quite slow and the risk of surpassing the target is quite low.

The RBNZ, in its statement mentioned that weak global conditions and low interest rates relative to New Zealand are maintaining an upward pressure on the NZD. The exchange rate continues to be higher than is sustainable for balanced economic growth, and along with low global inflation, continues to generate negative inflation in the tradable sector. The central bank stated that a decline in the exchange rate is required.