As expected the RBNZ lowered its overnight cash rate (OCR) by 25 basis points to 2.5 percent. This was the fourth rate cut since June as the dairy dependent economy contends with a price slump in milk and other dairy-related exports. The RBNZ cut its OCR in line with a dovish signal it sent to markets in late October. Subdued inflation had made room for the cut.
Governor Graeme Wheeler said domestic conditions have "softened" this year, "due mainly to lower terms of trade." The cuts this year now equal the four rate increases in 2013, when Mr Wheeler tried to get ahead of apparent inflationary pressures. Today he said that monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. The RBNZ expects to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant.
While there was a willingness to cut again, Mr Wheeler's assessment of the economy was rather upbeat and he forecast that inflation to return to the 1 percent to 3 percent target range early next year. On the economy he said "A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year. And on inflation he said "The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation and the lower New Zealand dollar will be reflected in higher tradables 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.
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