NZ: RBNZ Announcement

August 10, 2016 04:00 CDT

Consensus Actual Previous
change -25bp -25bp 0bp
Level 2.0% 2.0% 2.25%

As widely expected the Reserve Bank of New Zealand cut its overnight cash rate (OCR) by 25 basis points to 2 percent. The last time the RBNZ lowered its OCR was in March. In his statement, Governor Graeme Wheeler said that policy would continue to be accommodative. Furthermore, the RBNZ's current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the Bank's inflation target range of 1 percent to 3 percent.

The statement said that headline inflation is being held below the target band by continuing negative tradables inflation. Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices. However, it is expected to rise from the December quarter, reflecting policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation and rising non-tradables inflation. Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations. However, house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability.

The Governor called for a decline in the exchange rate. Weak global conditions combined with low interest rates relative to New Zealand is placing upward pressure on the New Zealand dollar. The high exchange rate adds pressure to the export and import-competing sectors making it difficult for the Bank to meet its inflation objective.

Domestic growth is expected to continue to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment. High net immigration is supporting strong growth in labour supply and limiting wage pressure.

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.