RBNZ cuts OCR to 2 pct, hints at another cut later

The Reserve Bank of New Zealand,during its monetary review meeting on Thursday, lowered its key interest rate to a new record low, in line with consensus expectations. The central bank cut its Official Cash Rate to 2 percent from 2.25 percent.  However, the RBNZ continues to face a slow return of inflation to target.

Thus the central bank has hinted at one more cut at least. The Monetary Policy Statement mentioned that “further policy easing will be required to ensure that future inflation settles near the middle of the target range”.

The decision of RBNZ today was a dovish shift from its June’s policy statement, noted Westpac in a research report. In June, the central bank’s 90-day interest rate track bottomed at 2.1 percent, while the rhetoric was in line with a 2 percent low in the cash rate. Today, the updated 90-day projection was released and was noticeably lower, indicating the 90-day rate at 1.75 percent.

“We expect a further 25bp cut in the OCR in November, which will take it to a low of 1.75 percent”, stated Westpac.

Even if there is the likelihood of a sooner reduction in rate during the September review, there is a lesser probability of the central bank cutting rate due to the continued strong GDP growth and restricted new data before the September meeting, added Westpac.

Furthermore, much of the requirement for additional cuts is dependent on the New Zealand dollar, which is likely to ease by the end of 2016; however, there is a risk that it continues to be high.