New Zealand interest rates cut to 2.5%

In a move widely expected by analysts, the Reserve Bank of New Zealand has cut the Official Cash Rate (OCR) to 2.5%, down 25 basis points, and hinted it could be cut further.

It’s the fourth and final cut this year, and takes the OCR to levels last seen between 2011 and early 2014.

Reserve Bank Governor Graeme Wheeler said growth in the New Zealand economy had softened over the year, mainly due to lower terms of trade.

“Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment.

“A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year.”

The housing bubble in the country’s largest city also had a part to play.

“House price inflation in Auckland remains high, posing a financial stability risk.

“Residential building is accelerating, and recent tax and LVR (loan-to-value ratio) measures are expected to reduce housing pressures.

“There are some early signs that Auckland house price inflation may be moderating.”

With inflation currently below the target range of 1% to 3%, Wheeler said it is expected to move back into the range early next year as petrol price declines drop out of the annual calculation and the lower New Zealand dollar is reflected in higher tradables prices.

However, he noted that there are a number of uncertainties and risks to the outlook.

“In the primary sector, there are risks that dairy prices remain weak for longer, and the current El Niño results in drought conditions and weaker output.

“Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices.”

He believed that the rate cut should bring inflation back in line, but hinted the bank would reduce rates further if needed.