The Reserve Bank of New Zealand has cut the official cash rate by 25 basis points to 3.25 percent and is signalling further cuts are on the way.
New Zealand sets an inflation target of around one to three percent and has been growing at an annual rate of around three percent, supported by low interest rates, high net migration, construction activity and a rise in fuel prices. However RNBZ’s Governor Graeme Wheeler stated that the main driver behind the rate cut is the more pronounced fall in export commodity prices. "The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed,"
"A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium-term inflation converges towards the middle of the target range"
The rate cut is also in light of Auckland house prices as they continue to rise. An increase in supply is necessary to address this.
The NZD dollar has fallen from its peak in April however is still trading at high levels despite a fall in commodity prices and an expected reduction in demand according to the Reserve Bank. In light of the rate cut the NZD dollar fell to US70.43c from US 72.02c and most recently traded at US70.44c.
Mr Wheeler stated "A further significant downward adjustment is justified,"
"In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path."
The Australian dollar lost about a quarter of a US cent on the back of the RBNZ rate cut and is being ‘thrown around’ according to ANZ senior FX Manager Sam Tuck.
"Markets love trading Aussie/Kiwi on New Zealand or Australia specific news so we're going to see here is the Aussie dollar being moved around by that sort of requirement for Aussie dollar liquidity," Mr Tuck said.