OCR cut to 2%, Wheeler signals further easing

The Reserve Bank has cut the official cash rate (OCR) by 25 basis points to 2% in a move that was widely expected.

The market was pricing in a 100% chance of a 0.25% cut this morning.

Reserve Bank governor Graeme Wheeler also indicated he planned to cut the OCR again.

“Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” he says.

Mr Wheeler says global growth is below trend despite being supported by unprecedented levels of monetary stimulus. 

“Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.”

He says the prospects for global growth and commodity prices remain uncertain and political risks are “also heightened.”

Mr Wheeler also says weak global conditions and low-interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.  

“The trade-weighted exchange rate is significantly higher than assumed in the June Statement.

“The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector,” he says.

He says domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. 

“But, 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,” Mr Wheeler says.

He says annual CPI inflation is expected to weaken in the September quarter, “reflecting lower fuel prices and cuts in ACC levies.” 

But, he says annual inflation is expected to rise from the December quarter, reflecting the 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.”

In the past week, speculation over whether the Reserve Bank would cut the OCR by 50 basis points, bringing it down to 1.75%, had mounted.

Despite the Reserve Bank of Australia cutting its OCR by 25 basis points last week, the Aussie dollar went up against the greenback as many didn’t see a 0.25% cut as doing enough.

Business commentator Bernard Hickey told Sunday Business a 25 basis point cut from the Reserve Bank of New Zealand might not be enough to bring the kiwi dollar down to a level the Reserve Bank is more comfortable with.

The trade-weighted index climbed as high as 76 this week – meanwhile, the kiwi dollar was buying more than US72c this morning before the cut.

“The kiwi dollar is roughly 6% over the Reserve Bank’s forecast – that is huge. On its own, that’s worth about a 60 basis point cut,” Westpac senior market strategist Imre Speizer told Currency Talk.

Although the OCR was cut by 25 basis today, economists are expecting at least one more cut by the end of this year.

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