NZ: RBNZ Announcement

November 9, 2016 02:00 CST

Consensus Actual Previous
change -25bp -25bp 0bp
Level 1.75% 1.75% 2.0%

As expected, the Reserve Bank of New Zealand has cut its policy rate, the overnight cash rate (OCR), by 25 basis points from 2.0 percent to 1.75 percent, a record low. This rate has been cut seven times since mid-2015, most recently in August, but today's statement notes that officials now expect current policy settings will be accommodative enough to get inflation back to its target range. The next policy meeting is scheduled for February next year.

Today's decision follows the release last month of inflation data for the three months to September. Inflation was originally reported at 0.2 percent but later revised to 0.4 percent after officials corrected an error in their calculations. This corrected level of inflation was the same as reported in the previous two quarters. Headline inflation has now been below the RBNZ's target range of 1.0 percent to 3.0 percent since late 2014, reflecting falls in global oil prices, weaker prices for tradable goods, and a relatively strong local currency.

Today's statement, however, repeats officials' assessment that inflation is likely to rise from the current quarter, reflecting the policy stimulus already delivered over the last eighteen months, the strength of the domestic economy, and smaller falls in the price of tradable goods. Based on this assessment, the RBNZ believes that inflation is on track to move back towards the middle of its target range, suggesting that for now officials do not expect that further policy rate cuts will be needed in the near-term.

Officials noted, however, that "numerous" uncertainties about the outlook remain. They also highlighted the negative impact on domestic inflation that the strong domestic currency is having and repeated their view that a decline in the exchange rate is needed. Reflecting these factors, the statement concluded that policy may still require further adjustments. In particular, if the currency fails to weaken in line with the RBNZ's wishes, another rate cut may be considered in the new year.

At a post-meeting press conference, RBNZ Governor Graeme Wheeler said that officials plan to keep policy rates low for an extended period. He also said that another rate cut would be made if circumstances warrant such a move, but that for now he does not see this as the most likely scenario.

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.