The Reserve Bank of New Zealand on Thursday lowered its Official Cash Rate by 25 basis points, to 3.25 percent from 3.50 percent.
That defied expectations for no change for a seventh consecutive month from the RBNZ, which had hiked the OCR by 25 basis points in each of previous four meetings prior to September.
Before that, there were 23 straight meetings with no change. The OCR had been at a record low 2.50 percent since March 10, 2011 as the country dealt with the global economic slowdown.
It wasn’t until last March that the central bank felt confident enough in a recovery that it lifted the OCR, although uncertainty remains.
“Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased,” RBNZ Governor Graeme Wheeler said in a statement accompanying the decision.
One of the biggest factors in the current global landscape, the bank said, was the dramatic decline in commodity prices – which has led to increased volatility.
And income growth has slowed, the bank added, due to a rebound in oil prices and a decline in dairy export prices.
Low inflation has allowed the bank to take action to spur the economy.
“Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued,” Wheeler said.
The bank justified the rate cut, pointing to falling commodity prices and a decline in demand.
The board also pointed to the easing NZ dollar, adding that further depreciation is to be expected.
“A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path,” Wheeler said.
The RBNZ added that further easing may be appropriate, depending on the results of forthcoming economic data.
“A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range,” Wheeler said.
The material has been provided by InstaForex Company – www.instaforex.com