Official Cash Rate cut to 3 %

Official Cash Rate cut to 3 percent

The Reserve Bank has reduced the Official Cash Rate and signalled further cuts are likely.

The central bank lowered the benchmark interest from 3.25 percent to 3 percent, citing slowing economic growth and a shaky global environment.

It says the economy is growing at an annual rate of about 2.5 percent, supported by low interest rates, robust construction activity and record high immigration.

But dairy prices have fallen sharply – about 20 percent in the last six weeks – while rebuilding activity in Christchurch appears to have peaked.

Inflation remains tame at 0.3 percent, well below the Reserve Bank’s 1-3 percent target band, due to previous strength in the New Zealand dollar and a large fall in oil prices.

The central bank is forecasting inflation will rise close to the midpoint of 2 percent by early 2016 because of the fall in the dollar, though it is unsure how quickly that will flow through into higher prices.

The lower dollar will help exporters and import competing sectors compete against their foreign rivals, but the Reserve Bank believes the currency should fall even further given the weakness in commodity prices.

It notes that house prices continue to increase rapidly, but outside Auckland, house price rises generally remain low.

The Reserve Bank is introducing more measures to curb riskier lending, but has said that building more houses is the only real solution to fixing Auckland’s housing problems.

The central bank says some further reductions in interest rates are likely.

Economists are divided about how low central bank governor Graeme Wheeler will go.

Some analysts are picking Mr Wheeler will unwind all of last year’s rate hikes before the end of the year, which would take the OCR back to its record low of 2.5 percent.

But some expect he will go further, and a drop to 2 percent cannot be ruled out.