NZ: RBNZ Announcement

Wed Jun 10 16:00:00 CDT 2015

Consensus Actual Previous
change 0bp -25bp 0bp
Level 3.5% 3.25% 3.5%

The Reserve Bank of New Zealand lowered its overnight cash rate by 25 basis points to 3.25 percent. The RBNZ most recently increased the OCR in July 2014 to 3.5 percent. Analysts were divided on whether the Bank would act at this meeting due to concerns over the hot Auckland housing market. However, Governor Graeme Wheeler said that the cut was not expected to affect housing there.

Like the Reserve Bank of Australia, the RBNZ maintains that its currency, the New Zealand dollar, is overvalued and further declines would be justified. It noted that further cuts in the OCR would be data dependent. However, the governor said he was 'happy' to see the New Zealand dollar fall and would like to see it decline further.

First quarter consumer prices were only 0.1 percent higher on the year compared with the Bank's inflation target range of 1 percent to 3 percent. A decline in international dairy prices is starting to hurt farm cash flows was a consideration. The New Zealand economy which is currently growing at an annual rate around three percent has been supported by low interest rates, high net migration and construction activity and the decline in fuel prices. However, the decline in export commodity prices that began in mid-2014 is proving more pronounced. "The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed."

Inflation has been low due to falling import prices and the strong growth in the economy's supply potential. Wage inflation and inflation expectations have been subdued.

Eight times a year, the Reserve Bank of New Zealand meets and decides whether to change or maintain New Zealand's Official Cash Rate. The RBNZ is known for its clarity regarding monetary policy intentions, thus the result is usually foreseen in advance. The decision aligns with the Reserve Bank of New Zealand's monetary policy to spur or slow economic growth or affect the exchange rate.

The RBNZ maintains an inflationary target range of 1 percent to 3 percent and will change rates to keep it within such a range, making rate decisions fairly predictable. Rate changes are significant nonetheless, affecting interest rates in consumer loans, mortgages, and bond rates. Increases or even expectations for rate increases tend to cause the New Zealand Dollar to appreciate, while rate decreases cause the currency to depreciate.

The RBNZ determines interest rate policy at it policy meetings. These meetings occur roughly every six weeks and are one of the most influential events for the markets. Market participants speculate about the possibility of an interest rate change. However, since the Bank is known for its clarity in setting policy, the result is usually built into the markets in advance. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Eight times a year.