RBNZ cuts OCR, signals 'softer' economic outlook

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See also: OCR cuts: good for KiwiSaver, bad for Kiwi savers

Reserve Bank governor Graeme Wheeler this morning cut the official cash rate from 3.25% to 3.0% and indicated further cuts are on the way.

"At this point, some further easing seems likely," Reserve Bank governor Graeme Wheeler says.

At the time of the last full monetary policy statement, six weeks ago, the Reserve Bank expected average annual GDP growth of about 3% for the next three years.

Today's statement did not include updated forecasts - these come with the next full monetary policy statement, on September 10 - but Mr Wheeler says the outlook is softer than it was in June.

"New Zealand's economy is currently growing at an annual rate of around 2.5%, supported by low interest rates, construction activity, and high net immigration," he says.

However, the Canterbury reconstruction "appears to have peaked, and the world price for New Zealand's dairy exports has fallen sharply."

"Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure.

"A key uncertainty is how quickly the exchange rate pass-through will occur."

This comment - and others related to inflation - make today's statement a highly contingent, and almost ambiguous one.

On the one hand, the Reserve Bank is hinting at the probability of further interest rate cuts than were signalled in June. The June statement, by way of its forecasts for 90 day interest rates, implied two more OCR cuts following the June cut. At the time, it appeared those cuts would be gradual - a second cut in September, and perhaps one at the  October or December reviews appeared possible.

The run of less-than-stellar economic data brought those cuts forward.

However, the comments on inflation and the New Zealand dollar in today's statement do not necessarily mean those economists forecasting OCR cuts below 2.5% are right.

How much the New Zealand dollar's fall translates into higher import prices is the key thing here. Wheeler is now saying the price inflation is now  expected to be "close to the midpoint" of the 1-3% range by early next year, due to both the drop in the currency and as the decline in oil prices drops out of the annual figure.

The June forecasts did not have the CPI reaching the mid-point until the final quarter of 2016.

Much will depend on how far businesses can pass on the cost of higher imports. The recent New Zealand Institute of Economic Research quarterly survey of business opinion indicates retailers have not been able to pass on recent falls.

A softening economic outlook will make it even more difficult for them, and other businesses, to do so.

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