New Zealand cuts interest rate to record low 1.75 pct

174

WELLINGTON: New Zealand’s central bank cut its benchmark interest rate to a record low of 1.75 percent on Thursday, citing global uncertainty caused in part by Donald Trump’s shock US election victory.

The Reserve Bank of New Zealand said it planned to trim its Official Cash Rate (OCR) by 0.25 points anyway but reaffirmed the decision in the wake of Trump’s win.

“Political uncertainty remains heightened and market volatility is elevated,” Governor Graeme Wheeler said.

Asked if he was referring to the US election result, Wheeler replied: “It’s one of the risks.

“There’s uncertainty about a lot of things… we’ve seen a result overnight that has clearly surprised the market,” he added.

But he said other political factors were also worrying the markets, including Brexit and Chinese Communist Party General Secretary Xi Jinping’s consolidation of power in Beijing.

Wheeler said another reason for the rate cut was New Zealand’s stubbornly low inflation, which has been below the bank’s 1.0-3.0 percent target for the past two years.

He said projections indicated this would soon change, meaning Thursday’s downward move may be the last in the current easing cycle.

“At this stage, we think that we won’t need another cut but if circumstances justified it, we’d look very closely at the data,” he told reporters.

New Zealand’s economic growth has remained strong at 3.6 percent in 2015/16, despite an international downturn in dairy, one of its major exports.

The New Zealand dollar has also defied expectations and remained buoyant, frustrating the central bank, which wants to bring it down to help exports.

The currency rose 0.64 US cents to 73.59 US cents after Thursday’s announcement.

Analysts were expecting the rate cut, which had been flagged several times by the central bank.

Westpac economist Imre Speizer said it appeared the bank was taking a neutral stance on further reductions after the current round of cuts began in July 2014, when the benchmark rate was 3.50 percent.

“This suggests a period of policy stability ahead,” he said.

However, Paul Dales of Capital Economics said the bank had taken “a leap of faith” in predicting inflation was set to rise and it might be forced into one more cut.

“We still think that low inflation may prompt another cut to 1.5 percent,” he said.