New Zealand cuts rates to record low

Bloomberg

New Zealand’s central bank cut interest rates to a fresh record low and hinted at the chance of a further reduction if necessary, becoming the first among developed-world economies to ease policy this cycle.
Governor Adrian Orr and his newly-formed Monetary Policy Committee decided that recent unexpected weakness in inflation and hiring warranted the Reserve Bank’s first rate cut since November 2016. New Zealand’s dollar fell.
The move was in contrast to decisions by central banks in the US and Australia, which opted to look through weakening inflation. The pioneer of inflation-targeting is taking a more activist approach: In late March, Orr flagged prospects for a reduction and economic data have been soft since, with the inflation rate falling to 1.5 percent and hiring declining.
“A lower official cash rate (OCR) is necessary to support the outlook for employment and inflation,” the RBNZ said after lowering the official cash rate a quarter of a percentage point to 1.5 percent.
“A lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for
interest rates.”
The kiwi bought 65.85 US cents in Wellington from 66.02 cents immediately before the statement. Two-year swap rates fell to a fresh record low.
The RBNZ’s projections show the average OCR dropping to 1.48 percent by the end of this year and 1.36 percent by the third quarter of 2020. They imply around a 50 percent probability of another cut, said Nick Tuffley, chief economist at ASB Bank in Auckland.
“The next move in the OCR will likely be data dependent; we have penciled in August but feel the risks are skewed to a later move,’’ he said. “The RBNZ’s current OCR outlook suggests a measured assessment before a further cut, rather than a sense of urgency.’’
Asked at a press conference whether the RBNZ still has an easing bias, Orr said: “We think we’re in a good position to be able to observe the data as it unfolds. Our forecast track is a slightly lower path than just one cut, but the uncertainties around that path are large.’’
While 14 of 20 economists surveyed by Bloomberg expected today’s move, market pricing of a cut dropped to less than 40 percent in the hours before the announcement. Traders are now pricing one further cut for the first quarter of next year, swaps show.
Wednesday’s decision was the first made by an enlarged policy committee comprised of four internal and three external members plus a non-voting Treasury observer. The decision was reached by consensus, according to a record of the meeting published on Wednesday.