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RBNZ takes path of least regret

10 March 2016
New, Zealand
While the case for further stimulus has been building, we didn’t think the RBNZ would cut again – at least not yet.  The Bank today took the path of least resistance, and probably least regret, and cut the Official Cash Rate (OCR) to a new record low of 2.25%.  
The RBNZ lays out the key reasons behind the cut being the deterioration in the global growth outlook, the difficult challenges facing the dairy sector, the strength in the trade weighted exchange rate, and the recent deterioration in inflation expectations.
The surprise is more about timing.  Today’s cut comes only a few weeks after the RBNZ Governor poured cold water on imminent interest rate reductions by cautioning against too great a focus on the low level of headline inflation.   Today’s surprise has seen a significant reaction in both interest and exchange rate markets.
Furthermore, while there are compelling reasons for the RBNZ to act there are also reasons to be cautious including whether further cuts to the OCR would make any meaningful difference to the domestic inflation outlook given the global nature of the disinflationary forces currently at play.  Also further interest rate cuts risk inflaming an already overheated Auckland housing market.
The key guidance paragraph is as follows:
“Headline inflation is expected to move higher over 2016, but take longer to reach the target range.  Monetary policy will continue to be accommodative.  Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.  We will continue to watch closely the emerging flow of economic data.”
We did think that if they cut again they would do more than one.  The interest rate projections signal one further cut which could come as early as April or the next Monetary Policy Statement in June.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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