Pressure goes on for interest rate cut

The Reserve Bank of New Zealand will find itself under more pressure to cut its official cash rate after the Reserve Bank of Australia cut its lending rate to 1.75%.

The decision was something of a surprise because the Australian Federal Budget was to be released five hours later but market commentators believed the threat of deflation was so strong in Australia, the RBA had no option but to cut.

The New Zealand central bank held its OCR at 2.25% last week after data showed a strengthening economy and perhaps higher inflation on the way.

Now, the pressure will mount for the bank to cut to 2% next month - its earliest opportunity - and again in August to match the RBA.

• Australian budget delivered

The New Zealand dollar rose against the Australian dollar after RBA governor Glenn Stevens said in a statement the decision to lower the cash rate by 0.25% followed information showing inflationary pressures were lower than expected.

The dollar spiked at A94.49c before ending yesterday at A92.32c, up A0.28c from Monday's close.

‘‘Inflation has been quite low for some time and recent data were unexpectedly low. While quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.''

Monetary policy had been accommodative for some time, he said. Low interest rates had been supporting demand and the lower exchange rate overall had helped the traded sector.

Credit growth to households continued at a moderate pace, while that to businesses had increased over the past year or so, Mr Stevens said.

‘‘These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.''

In reaching the decision, the board took careful note of developments in the housing market, where indications were the effect of supervisory measures were strengthening lending standards and price pressures were abating. At present, the potential risks of lower rates in that area were less than they were a year ago, he said.

Craigs Investment Partners broker Peter McIntyre said there was now a ‘‘significant'' interest rate differential between New Zealand and Australia and the carry trade was likely to become more popular.

The carry trade was a strategy in which an investor borrowed money at a low interest rate in order to invest in an asset likely to provide a higher return. This strategy was common in the foreign exchange market.

In the last seven trading days, the New Zealand dollar had risen from A88.84c to A94.49c, he said.

‘‘The implications ... is bad for exporters into Australia but good for those wanting to travel to Australia.

‘‘The pressure will come on to the Reserve Bank [of New Zealand] to cut in June.''

ASB chief economist Nick Tuffley said the New Zealand central bank still saw itself as on track for one more 0.25% cut, but might take its time. Back-to-back Monetary Policy Statements in June and August offered a unique opportunity for the Reserve Bank and delaying until August was seen as a real possibility.

‘‘It is a fine line to walk. In the past the Reserve Bank has, presumably unintentionally, pushed the dollar higher with its December Monetary Policy Statement and a February speech.

‘‘Even the quite carefully worded statement last week still pushed up the dollar and interest rates more than it needed, even allowing for the on-hold decision. The longer the Reserve Bank cries ‘cut' without one appearing, the more the market will doubt the bank's intention to follow through.''

The dollar and interest rates would probably creep up further, undermining the whole point, Mr Tuffley said.

The Reserve Bank would eventually weaken its inflation outlook, as it had done in the past year. Comparing the ASB inflation outlook to the Reserve Bank's, it would take 12 months longer for inflation to sustainably remain above 1%.

The ASB forecast did not hit the 2% mid-point for nearly three years, again 12 months longer than the Reserve Bank's forecast, he said.

‘‘Ultimately, we think the Reserve Bank will need to do more and we have stayed with our forecast of a 1.75% OCR.''

 


At a glance

•RBA cuts official cash rate to 1.75%

•New Zealand dollar rises against Australian currency

•Higher dollar is bad news for exporters and good news for travellers

•New Zealand Reserve Bank will come under pressure to cut rates next month and again in August

 



 

Add a Comment