New Zealand central bank cuts interest rate to record low

The Reserve Bank of New Zealand (RBNZ) cut its benchmark interest rate by 25 basis points to a record low of 2.25% on Thursday; the fifth such move since June 2015.

It last cut rates in December from 2.75% to 2.5%, but the latest move came as a surprise to forex markets, with the New Zealand dollar shedding 1% intraday, before recovering during the European session.

RBNZ governor Graeme Wheeler attributed the move to the central bank’s concern over global growth and weaker demand from China – a key trading partner and exporting destination for New Zealand’s dairy products.

He also hinted at further interest rates cuts, expressing concerns about “weaker growth in China and other emerging markets, and slower growth in Europe."

New Zealand's dairy sector is its mainstay, with the country exporting 95% of its milk products. Furthermore, the annual rate of inflation is currently at 0.1%, well below RBNZ’s target range of 1-3%.

However, Wheeler sounded optimistic about the outlook for New Zealand’s inflation and economic growth scenarios for 2016. "Strong inward migration, tourism, a pipeline of construction activity, and accommodative monetary policy would assist growth."

Alvin Tan, forx analyst at Societe Generale said, "The AUD/NZD cross broke through the $1.10/1.11 ceiling of the five-month range. The next big level is $1.14. NZD/CAD meanwhile tumbled to 0.88. We continue to favour being short NZD against both AUD and CAD."