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UPDATE: RBNZ slashes cash rate to 1%, dollar tumbles

By Rebecca Howard

Aug. 7 (BusinessDesk) - The Reserve Bank slashed the official cash rate by 50 basis points to 1 percent due to a softer outlook for employment and inflation, slower economic growth and weaker global conditions. The New Zealand dollar tumbled.

"Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level," the monetary policy committee - which includes three external members - said in a statement.

New Zealand's central bank now has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. Annual inflation is currently running at 1.7 percent.

Sixteen of 17 economists polled by Bloomberg had expected a 25 basis point move while one had expected the bank to stay on hold.

According to a summary record of meeting, the members debated the relative benefits of a 25 basis point cut and communicating an easing bias, versus reducing the cash rate by 50 basis points now.

“The committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the committee continues to meet its inflation and employment objectives,” it said.

Changes to the central bank’s forecasts in the latest monetary policy statement also show a chance for another cut as the forecast interest rate track eases to 0.9 percent in late 2020. The prior monetary statement in May showed the OCR tracking going from 1.7 percent to 1.4 percent in March 2020 before lifting in late 2021.

The "RBNZ’s OCR forecast now has a low of 0.9 percent, still implying an easing bias. The meeting minutes and statement were less clear on the need for further action, but continued to note downside risks," said ASB Bank chief economist Nick Tuffley.

The New Zealand dollar recently traded at 64.24 US cents from 65.44 cents just prior to the statement.

According to the central bank, “GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.”

It noted that annual GDP growth was 2.5 percent in the March quarter, “below our estimate of potential growth in the New Zealand economy.”

The Reserve Bank cut its forecast for GDP growth in the June quarter to 0.5 percent from a prior forecast of 0.7 percent. It now sees GDP growth of 0.6 percent in the September quarter versus a prior forecast of 0.9 percent.

It said, however, that monetary stimulus is expected to give impetus to growth from late 2019. Market interest rates have declined since the start of 2019. This supports consumption and investment, and keeps the New Zealand dollar exchange rate lower, the committee said.

Fiscal policy is also expected to support growth.

It also noted that global economic activity continues to weaken, trimming demand for New Zealand’s goods and services. Heightened uncertainty and declining international trade have contributed to lower trading-partner growth. Central banks are easing monetary policy to support their economies, it said.

New Zealand’s official cash rate is now in line with that of Australia. On Tuesday, the Reserve Bank of Australia held rates steady at 1 percent but left the door open for more cuts. The kiwi dollar dropped to 95.60 Australian cents from 96.50 cents immediately before the RBNZ release.

Tuffley said even after today's surprisingly big cut in New Zealand "the risks remain skewed to an even lower trough than the current 1 percent OCR. We forecast a further 25 basis point cut to 0.75 percent, in November," he said.

Regarding employment, the committee said it was pleased to see labour market data held up relative to expectations in the June quarter but “agreed that the balance of risks to achieving its consumer price inflation and maximum sustainable employment objectives was tilted to the downside.” New Zealand's unemployment rate hit an 11-year low in the June quarter, falling to 3.9 percent from 4.2 percent in the March quarter.

"Slower GDP growth over the past year is expected to reduce capacity pressure and reduce employment relative to its maximum sustainable level in the near term. Inflation is likely to remain below the 2 percent target mid-point throughout 2019 and into 2020," it said.

As a result "a lower OCR is necessary to achieve our objectives."

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