Talking Points:
- Key policy rate cut by 25 basis points to 3.25%, against predictions
- RBNZ says further easing may be needed, NZ dollar remains overvalued
- New Zealand dollar dropped over 150 pips after rate cut
The New Zealand dollar declined as much as 2.4 percent (over 175 pips) versus the US dollar. The drop came after the RBNZ cut its benchmark lending rate by 25 basis points to 3.25 percent. This was the first rate cut since January 2011 and reverses a period of rate hikes that the central bank engaged in 2014.
Furthermore, RBNZ Governor Graeme Wheeler said that further easing may be appropriate depending on emerging data going forward. He would go on to say that significant further downward pressure for the Kiwi is justified. Simultaneously, New Zealand government bond yields declined across the board suggesting the move lower was of rate cut speculation.
The bank argued that the rate cut was appropriate given the low inflation pressure. They see inflation reaching the 2 percent target around the fourth quarter of 2016. Alongside the projected currency decline, the central bank said inflation should accelerate. The RBNZ also said labor force growth in New Zealand is boosting capacity which is dampening inflation – insinuating a connection between labor and inflation elements. In addition, RBNZ’s governor Wheeler said a lower cash rate would help support dairy farmers in New Zealand. The dairy industry represents one of the country’s largest exports.
