RBNZ unveils shock rate cut, signals more easing

Article Link: RBNZ unveils shock rate cut, signals more easing

The New Zealand dollar shed just over 1 U.S. cent early on Thursday after the Reserve Bank of New Zealand (RBNZ) surprised by cutting the cash rate to a record low 2.25 percent and left the door open for more easing.

The Kiwi dollar slid as far as $0.6650, from around $0.6783, after the rate decision, in which the central bank cited a material decline in a range of inflation expectation measures.

Of 21 economists polled by Reuters, 17 had expected the bank to hold rates steady with only four predicting the quarter-percentage-point cut.

The central bank also signaled at least one more rate cut to come.

“Monetary policy will continue to be accommodative,” RBNZ Governor Graeme Wheeler said in a statement. “Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”

Evan Lucas, market strategist at IG, wrote in a morning note that “the market will clearly start pricing in at least one more 25 bps cut and possibly two. Rates could be sub-2 percent in December.”

Analysts at Goldman Sachs forecast further policy easing “around mid-year.”.

“Beyond the global backdrop, key things to watch in the interim will be updates on inflation expectations, wages growth, the NZD, business surveys, how lower dairy prices are impacting domestic activity and house prices,” the analysts wrote in a note released after the RBNZ’s statement.

“For our part, we continue to see the risks as skewed towards growth falling short of expectations, and worry that clear evidence of a stabilization in inflation expectations is far from a given over the nearer term.”

The RBNZ is mandated to keep annual inflation in a 1 percent to 3 percent target range. With annual inflation currently hovering around 0.1 percent and inflation expectations at a 22-year low, the central bank opted to cut.

“The RBNZ has clearly been spooked by the recent weakening in the outlook for the global economy, the strengthening in the New Zealand dollar and the fall in domestic inflation expectations,” said Paul Dales, Chief Australia & NZ Economist for Capital Economics.

Dales said there is now a “real possibility” interest rates could fall blow 2.0 percent.

While long-term inflation expectations are well anchored at 2 percent, “there has been a material decline in a range of inflation expectation measures,” said RBNZ’s Wheeler.

The central bank’s assistant governor John McDermott told journalists Thursday’s decision was “really about trying to stabilize inflation expectations.”

The central bank now expects the headline inflation figure to return within the target band by late 2016, rather than in the current quarter.

The central bank’s forecasts – reflected in its 90-day bank bill rates – also point to another rate cut.

The bank forecast a 90-day bank bill rate of 2.2 percent by December 2016, down from the 2.6 percent it predicted at its last meeting.

The New Zealand dollar is “likely to remain under pressure” as the market adjusts to the significant downward revision to the bank’s 90-day bill projections, ANZ Bank said in a note.

The central bank cut rates four times between June and December last year, reversing four rate hikes in 2014. Further cuts were stalled by a housing boom in Auckland that has begun to spread across the country and strong economic data.

However, the outlook for global growth has deteriorated, the domestic dairy sector faces “difficult challenges” and the New Zealand dollar is more than 4 percent higher than projected in December on a trade-weighted basis, Wheeler added.

– CNBC contributed to this report.

– Follow CNBC International on Twitter and Facebook.

Source: CNN Investing