Tuesday, 18 June, 2019

Big interest rate decision due - what it means for you

Top 5 Events May RBNZ Meeting Preview & NZDUSD Price Forecast Reserve Bank of New Zealand cuts interest rates while RBA stands still - Business
Russell Knight | 10 May, 2019, 09:55

The Reserve Bank (RBNZ) has cut its benchmark interest rate for the first time in more than two years as it tries to stimulate growth and protect against a slowing world economy.

The decision to cut rates appears to be based on a different approach to monetary policy, with the RBNZ looking to support growth ahead of a substantial rise in the jobless rate.

The central bank's new monetary policy committee decided a lower OCR was necessary to support the outlook for employment and inflation, consistent with its policy remit.

The New Zealand dollar stumbled to a six-month low of $0.6525 following the rate decision while government bonds jumped, sending yields 5-7 basis points lower across the curve.

Additionally businesses needing working capital and the capacity to upgrade or install new technology to become more productive and benefit the country's economy should not be disadvantaged by banks not reducing their lending rates on current and future loans by the full amount of the Reserve Banks' cut in rates.

"Given the magnitude of the downward revision to the RBNZ's Q1 growth outlook, the hurdle for near-term further disappointment is high, but the RBNZ's growth forecasts further out are considerably higher than our own". The latest forecasts show OCR falling to 1.4 percent in March 2020, compared to prior forecast of 1.8 percent. "This allows for the possibility of further OCR cuts, but does not commit the RBNZ".

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Mr Stephens judged the probability of a follow-up OCR cut in June as low, but August as more of a live possibility. It sees growth rebounding to 3.2% in 2020.

In March, however, governor Adrian Orr surprised markets when he said that, given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of the next official cash rate move was down. A majority of economists were also expecting a cut.

The New Zealand dollar was trading at US66c before the statement, then fell to around US65.56c.

The RBNZ now expects only 0.4 percent q/q growth in Q1 (previously 0.8 percent), but have kept Q2 unchanged at 0.7 percent and bumped up growth from the second half of the year. Interest rates have been falling steadily for months as the outlook for interest rates weakened.

ANZ and Kiwibank both announced cuts to their mortgage rates moments after the decision.

According to the record of the MPC meeting, some members of the committee shared our concern that the housing market upturn could be larger than the RBNZ is forecasting.

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