• The RBNZ cut New Zealand’s cash rate by 25 basis points to 1.5% in May, leaving it at a new record low.
• The decision was in line with economist exceptions. Financial markets had marginally favoured that rates would be left unchanged.
• The RBNZ cited international risks, along with downside risks for employment and inflation, as factors behind the decision to ease policy settings.
• It forecast a modest risk that policy rates could be cut again.
• The New Zealand dollar initially plunged on the news, falling to the lowest level since early November against the greenback, but has since recovered some of its initial losses.

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The Reserve Bank of New Zealand (RBNZ) cut official interest rates at its May monetary policy meeting.

The cash rate was reduced by 25 basis points to 1.5%, marking the first adjustment in policy settings since rates were reduced in late 2016.

The result was favoured by a slim majority of economists but not financial markets.

“The Monetary Policy Committee decided a lower overnight cash rate (OCR) is necessary to support the outlook for employment and inflation consistent with its policy remit,” the RBNZ.

“Global economic growth has slowed since mid-2018, easing demand for New Zealand’s goods and services.

“This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects.”

The RBNZ acknowledged uncertainty towards the global economic outlook was elevated, noting that while “trade concerns remain” some other indicators suggest “trading-partner growth is stabilising”.

However, from a domestic standpoint, it saw the need to support activity levels given recent weakness in economic growth, inflation and employment.

“Domestic growth slowed from the second half of 2018,” the bank said.

“Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending.”

“Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment.”

With economic activity slowing, the RBNZ said softer employment growth would lead to continued weakness in inflation without additional monetary policy support.

“The outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly,” it said.

“Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.”

The table below details the RBNZ updated economic forecasts.

The bank’s cash rate forecasts suggest there’s a risk, albeit not a meaningful one at this point, that it may cut rates again to 1.25% by early next year, a view in line similar to market pricing prior to today’s announcement.

Explaining why it still believes further easing may be necessary, the bank doesn’t see inflation returning to the midpoint of its 1-3% target until the June quarter of 2021.

That’s despite an expected lift in economic growth in the coming quarters and a modest depreciation in the New Zealand dollar over the same period.

Ben Udy, Economist at Capital Economics, said today’s cut won’t be the last seen this year.

“Subdued economic growth and a softening labour market mean that today’s interest rate cut by the RBNZ will be repeated before the year is out,” he said.

“An acceleration in GDP growth in the first quarter may stave off another rate cut for the next few months, but as unemployment rises and growth remains subdued in the second half of the year, we think the bank will cut rates to 1.25% in November.”

With financial markets marginally favouring that policy settings would remain steady at this meeting, the New Zealand dollar initially plunged on the announcement, slumping over 1% against the greenback to .6529, the lowest level since early November last year.

It’s subsequently bounced in recent trade, currently fetching .6577.

“We don’t expect a sustained fall in NZD because New Zealand’s commodity prices are high and rate cuts are already priced,” said Joseph Capurso, Senior Currency strategist at the Commonwealth.

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