The Reserve Bank of New Zealand (RBNZ) kept its official cash rate unchanged at 2.75% at its October meeting after cutting them by 25 basis points at each of its previous three meetings. A slowdown in economic growth from tumbling global dairy prices and lower inflation from falling oil prices prompted the central bank to start loosening monetary policy in June for the first time in four years. The RBNZ was among few central banks in advanced economies to tighten monetary policy after the financial crisis.
In the accompanying statement that followed the RBNZ decision, the Governor Graeme Wheeler expressed concern at the slower growth prospects in China and East Asia, despite the easing of volatility in financial markets. However, there are signs of domestic growth rebounding with strong growth seen in New Zealand’s services and construction sectors. Global dairy prices have also picked-up in recent weeks, but it was too early to say whether this trend will be sustained according to Wheeler.
The housing market continues to pose a risk to financial stability due to supply shortages. The RBNZ, together with the government, have imposed new lending restrictions to contain the property bubble, particularly in Auckland.
Having adopted a wait-and-see approach at the current meeting, the RBNZ cited the recent appreciation of the New Zealand dollar as a possible downside risk to exports and inflation. If sustained, Wheeler said “this would require a lower interest rate path than would otherwise be the case” and reiterated the likelihood of further reduction in the official cash rate.
The kiwi has gained around 9% against the US dollar since the end of August, moving away from 6-year lows. On Wednesday, it fell sharply against the greenback after the Fed’s own monetary policy decision. The Fed’s hawkish statement sent the New Zealand currency down to 0.6643 US dollars. It briefly rose after the RBNZ’s decision to keep rates unchanged but fell back on the dovish statement, hitting a low of 0.6620. However, the kiwi rallied again today in European trading and was testing the 0.67 handle.