WELLINGTON (Reuters) - New Zealand’s central bank cut its benchmark interest rate for the first time in two-and-a-half years on Wednesday, and signaled a 50-50 chance of another easing, sending the local dollar sharply lower.
The Reserve Bank of New Zealand (RBNZ) lowered the official cash rate (OCR) by 25 basis point to an all-time trough of 1.50 percent, as expected, after switching in March to an explicitly dovish footing on weaker domestic activity and employment headwinds.
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.
In its guidance, the RBNZ said “a lower path for the OCR over the projection period was appropriate.”
At a press conference after the decision, RBNZ Governor Adrian Orr flagged the ongoing U.S.-China trade dispute as a major risk for New Zealand’s economy.
“I can’t say whether we’re closer to a resolution or not...but global trade is incredibly important to our economy,” Orr said.
The dispute between the world’s two largest economies re-escalated this week after U.S. President Donald Trump threatened to implement additional tariffs on Friday, accusing China of reneging on previous commitments it made during trade talks. The renewed tensions have revived fears about their impact of global growth.
Domestically, Orr noted weaker than projected business investment and consumer spending had presented big downside surprises for the committee in their assessment of the economy.
The RBNZ also pointed to weaker population growth following the country’s center-left government’s efforts to curb immigration along with falling house prices for a slowdown in household spending.
The rate review was the first since the central bank shifted to a new decision model in which rates are set by a committee of internal RBNZ officials and some external members, not solely by the governor. The committee reached a consensus decision on Wednesday to cut the OCR.
With the easing, the RBNZ joins a slew of other central banks in the region, including neighboring Australia, who have either already cut rates or have signaled a shift to do so to boost growth and lift inflation.
The RBNZ fell short of providing explicit guidance on future moves but said “a lower path for the OCR over the projection period was appropriate.”
The bank’s forecast horizon extends through to June 2022. Rates are seen at 1.36 percent in September and December 2020, implying a more than 50 percent chance of another cut.
Orr said there were significant uncertainties around its rate projections.
ANZ’s New Zealand Chief Economist, Sharon Zollner, said the RBNZ is likely to be cautious in its policy deliberations given the current uncertainties but that a “one and done” scenario would be unusual.
“By November the ducks will have lined up for another cut, followed by one in February,” Zollner wrote in a note. “In our view deterioration in global conditions is the primary risk that could bring this forward.”
Expectations for a cut had grown in recent months, as New Zealand struggled with weak economic momentum, slowing global growth and inflation falling further below its target.
Labor figures last week showed tepid wage growth and falling employment, while business sentiment has also remained gloomy - all adding to arguments for a rate cut.
The RBNZ said in the statement that the country’s employment was near its “maximum sustainable level” but the outlook was more subdued with capacity pressure expected to ease slightly this year. It also expects inflationary pressure to rise slowly.
Reporting by Charlotte Greenfield and Praveen Menon in WELLINGTON, Swati Pandey in SYDNEY; Editing by Sam Holmes