RBNZ cuts cash rate to 3 per cent

The Reserve Bank of New Zealand has cut the Official Cash Rate by 25 basis points to 3.0 per cent as widely expected and has foreshadowed more rate cuts later this year.

The bank chose not to cut by the 50 basis points that some had hoped, arguing that the sharp fall in the New Zealand dollar this year would help lift annual inflation to close to the mid-point of the bank's one to three per cent target range by early 2016.

Despite the currency fall, the Reserve Bank said further depreciation was needed, given the weakness in commodity prices since the Reserve Bank's last full Monetary Policy Statement on June 11.

Governor Graeme Wheeler said global economic growth remained moderate with only a gradual pick-up in activity forecast. He highlighted recent developments in China and Europe that had led to heightened uncertainty and increased financial market volatility.

The New Zealand economy was growing at an annual rate of around 2.5 per cent and was supported by low interest rates, construction activity and high net migration. The bank saw growth running at around three per cent in its June MPS.

"While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices," Wheeler said of the currency.

The Governor made no mention of the currency being unjustifiably and unsustainably high, as he has done in previous statements. (The bank's June 11 MPS said: "significant downward adjustment is justified" and needed to put New Zealand's net external position on a more sustainable path.) There was no mention of the net external position in today's statement.

The Governor then summed up by saying: "A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely."

The bank's June 11 statement said the first cut of 25 basis points to 3.25 per cent was needed to ensure medium term inflation converged to the middle of the target. It also said then that it expected "further easing may be appropriate," which would "depend on the emerging data."

There was no mention of further easings being dependent on emerging data in today's statement, which economists viewed as confirming an easing bias, but not necessarily being as dovish as some had hoped.

Wholesale interest rates rose by around five basis points on some disappointment over the slightly less dovish than expected commentary, while the New Zealand dollar rose over 50 basis points, to US66.2 cents, because of the RBNZ's slightly less aggressive jawboning on the currency.