NZ: RBNZ Announcement

Wed Jul 22 16:00:00 CDT 2015

Consensus Actual Previous
change -25bp -25bp -25bp
Level 3.0% 3.0% 3.25%

As broadly anticipated, the RBNZ lowered its overnight cash rate (OCR) by 25 basis points to 3.0 percent. The Bank has now lowered its OCR at three consecutive meetings and indicated that further cuts were likely.

The economy has been losing momentum including sharp declines in household and business confidence. Commodity prices have dropped sharply taking them to the lowest level in six years. Almost every product declined. There also has been a softness in inflation. Consumer prices rose by 0.3 percent over the past year. While this is up from the very weak March result, it is still the second slowest pace in 15 years. The main factor boosting inflation was higher petrol prices, which will weigh on household demand over the coming months. Adding to the challenges for the economy is that one of the major drivers of growth in recent years, the Canterbury rebuild, is starting to dissipate. In recent years, increases in the amount of reconstruction work completed each quarter provided a significant boost to GDP growth and employment.

According to the RBNZ, "New Zealand's economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand's dairy exports has fallen sharply.

"Headline inflation is currently below the Bank's 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.

"House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.

"The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices."

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.