New Zealand could cut rates again, won't rule out negative rates - central bank assistant governor

WELLINGTON (Reuters) - New Zealand’s central bank could ease rates again, the assistant governor said on Thursday, a day after the bank stunned markets with a steep 50 basis-point cut to the official cash rate (OCR) and flagged the risk of negative rates to fight slowing growth.

FILE PHOTO - A security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

“We’ve got a more balanced outlook for the OCR now...but even within those projections there’s some probability in there that we will need to reduce the OCR from where it is at the moment,” assistant governor Christian Hawkesby told Reuters in an interview.

Hawkesby also reiterated that the central bank was willing to use negative interest rates if needed to stimulate growth and meet its policy objectives.

The Reserve Bank of New Zealand’s (RBNZ) decision the previous day jolted markets and economists, who were expecting a cut of just 25 basis points, similar to the one delivered in May.

Instead, citing compounding international risks and sinking interest rates globally, the central bank cut rates to a fresh record low of 1% and governor Adrian Orr even raised the possibility of using negative interest rates in the future.

The market reaction was swift. The kiwi dollar NZD=D4 tumbled 2% to $0.6376 on Wednesday, its lowest since early 2016 and the steepest daily decline in a year, while yields on two-year bonds NZ2YT=RR sank to just 0.81% as investors priced in the prospect of at least one more rate cut.

Policymakers everywhere have been forced to consider more stimulus as fears grow over the broadening fallout of the U.S.-China trade dispute on the global economy.

Following the New Zealand surprise, India’s central bank cut by a slightly bigger-than-expected 35 bps on Wednesday, while the Bank of Thailand also unexpectedly reduced its key rate.

Last week, the U.S. Federal Reserve cut rates for the first time in a decade, while the Reserve Bank of Australia eased in both June and July.

Hawkesby said the RBNZ’s monetary policy committee had been keenly aware that markets had priced in a cut to the OCR to 1.25% and that the currency would face downwards pressure with a larger reduction in a boost to exporters.

“It’s all part of the story of us getting back to our targets.”

He said the central bank hoped that a large reduction now would help it avoid another cut, but added that further easing was still a possibility and the bank was also “completely open” to using negative interest rates or other unconventional tools if necessary.

The deteriorating global outlook and how that filtered through to domestic business confidence were the main considerations for any further easing, Hawkesby said.

“The obvious one is the global environment where we feel like the risks are tilted to the downside, and that was one of the factors that prompted us to ease with the 50 basis points this time around.”

Reporting by Charlotte Greenfield and Praveen Menon; Editing by Shri Navaratnam