As pretty much expected the Reserve Bank of New Zealand cut its official cash rate (OCR) by 25 basis points to 2.75 percent. This was the third 25 basis point reduction in the OCR this year. The RBNZ said the cut was warranted by the softening of the economy and the need to keep future average inflation near the 2 percent midpoint of its inflation target range. It said that some future easing seemed likely but will be data dependent.
It noted that global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. "Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices." While the US economy continues to expand, financial markets remain uncertain as to the timing and impact of an expected tightening in US monetary policy.
The Bank noted that the domestic economy was adjusting to the sharp decline in export prices, and the consequent decline in the exchange rate. It said that the slowdown was due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around 2 percent. However, several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar.
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.
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