Official Cash Rate Cut

The Reserve Bank has cut the official cash rate, as expected, and says a further easing seems likely.

Governor Graeme Wheeler cut the OCR a quarter point to 2.75 per cent, saying the reduction was warranted because of the softening New Zealand economy.

He cut the near-term track for economic growth, slashed the projected path of the trade-weighted index and forecast the 90-day bank bill rate will settle 50 basis points lower than was seen in the June monetary policy statement.

But having lowered the estimates for annual inflation this year, the Reserve Bank sees inflation rising above the mid-point of its target range by September 2016.

“Headline inflation is expected to return well within the target range by early 2016, as the earlier petrol price decline drops out of the annual inflation calculation, and as the exchange rate depreciation passes through into higher tradables prices,” Mr Wheeler said.

Some further easing in the OCR seems likely, depending on the emerging flow of economic data, he says.

The New Zealand economy is growing at an annual pace of about 2 per cent – down from a previous estimate of 2.5 per cent, Mr Wheeler said.

The domestic economy was adjusting to a sharp decline in export prices and consequent fall in the exchange rate, while building work in Canterbury was plateauing and both business and consumer confidence had weakened, he said.

The biggest adjustment to the bank’s projections is for the exchange rate. It sees the TWI averaging 67.9 in the fourth quarter, down from its June forecast of 73.6, and sinking to an average 64.8 in the June quarter 2017.

Mr Wheeler softened his language on the currency, saying that “further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.”

Yet one of the bank’s key assumptions is that commodity prices have “troughed” and are now on the way to a gradual recovery.

That’s been reflected in the past two GlobalDairyTrade auctions, which have seen a rebound in prices from a six-year low after Fonterra Cooperative Group cut the volumes of milk powder offered for sale.

House prices in Auckland “continue to increase rapidly and are becoming more unsustainable,” Mr Wheeler said.

It “will take some time” before a rise in residential construction in the country’s biggest city is able to correct the imbalance, he said.

The monetary policy statement makes little mention of fiscal impetus, but it does project slower return to budget surplus than Finance Minister Bill English has predicted.