Kiwi dollar plunges as Reserve Bank hints at interest rate cut
Wednesday, 27 March 2019
A slowing world economy and weaker domestic spending has led the Reserve Bank to hint that interest rates could be cut.
In the latest review of the official cash rate (OCR), the central bank left the benchmark rate at 1.75 per cent, but said emerging conditions meant 'the more likely direction of our next OCR move is down'.
Economists had not expected the central bank to soften its position so thoroughly. In earlier reviews, including in February, governor Adrian Orr said there was an even chance that interest rates could rise or fall, but its projections suggested interest rate would increase eventually.
The New Zealand dollar plunged on the softer than expected stance, down around a cent against the US dollar and more than a cent against the Australian dollar.
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In recent days the New Zealand dollar has been buying more than A97c, the highest in more than two years, but after the Reserve Bank announcement it fell to around A95.8c
A weaker dollar makes imported goods more expensive, however New Zealand's exports become relatively cheaper overseas and New Zealand becomes cheaper holiday destination for overseas visitors.
Products linked to future interest rates also weakened, suggesting borrowing rates offered by banks on mortgages could also fall.
Banks predict cuts
Kiwibank senior economist Jeremy Couchman immediately predicted that the Reserve Bank will cut the OCR at its next review in May, with another rate cut coming later in the year.
Previously the state-owned bank had predicted the OCR would sit unmoved until well into 2021.
ASB chief economist Nick Tuffley said there had been a 'clear shift' in the Reserve Bank's stance, and every interest rate review in the short term was now 'live' for a potential interest rate cut.
'There are still a number of supports for the economy,' Tuffley said.
'But we have mounting concern that growth will not pick up sufficiently quickly to drive inflation pressures up, particularly as business confidence started the year on a softer tone. If the economy doesn't start showing greater signs of life soon then the Reserve Bank could conceivably cut as early as May.'
Less than two hours after the Reserve Bank's statement, ASB formally predicted 50 basis points of interest rate cuts before the end of the year, starting in August.
ANZ, which became the first major bank to predict interest rate cuts, back in late 2018, said it now saw a risk that the OCR would be cut earlier than its November prediction.
Westpac chief economist Dominick Stephens said the statement was surprising because it marked a significant change in tone for the central bank since its last statement.
'We were very surprised by this change of stance, because the economic situation has not changed much since the Reserve Bank's last missive in February,' Stephens said.
'Perhaps the main reason for the change of stance was the actions of other central banks' which had indicated interest rate increases were less likely.
Annual growth slowed to 2.3 per cent, the slowest since 2013.
The Reserve Bank's statement pointed to weakness in the economy in New Zealand and internationally.
'The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China,' the Reserve Bank's statement said.
'This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.'
Meanwhile, the bank acknowledged that the New Zealand economy has also softened.
'Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.'