Roundup: New Zealand interest rate cut highlights economic challenges ahead

The first cut in the New Zealand central bank's interest rate in more than four years was welcomed by business and politicians alike Thursday, but it also highlighted the economic challenges ahead.

The Reserve Bank of New Zealand (RBNZ) cut 25 basis points to bring the official cash rate to 3.25 percent -- the first change since July last year and the first cut since March 2011.

Reserve Bank governor Graeme Wheeler said in his statement that while the economy was growing by an average of 3 percent, inflation was tracking below the bank's target range of 1 percent to 3 percent.

He also highlighted the plunge in global dairy prices and rebounding oil prices as possible constraints on growth, and he repeated his concern that the New Zealand dollar remained overvalued.

The New Zealand Manufacturers and Exporters Association (NZMEA) welcomed the OCR cut, saying manufacturers and exporters had been working hard to compete in trying conditions for some time.

"New Zealand's interest rates have been an outlier compared to the rest of the advanced world for some time, and weakening conditions, low inflation and our overvalued currency justify the RBNZ's move," NZMEA chief executive Dieter Adam said in a statement.

But it was the possible effect of a rate cut on soaring house prices in Auckland, the country's largest city and home to a quarter of the population, that caused consternation among commentators.

The Reserve Bank has repeatedly warned that the overheating housing market is a risk to the country's financial stability, but the official cash rate (OCR) cut indicated other pressures were also building.

Prime Minister John Key told Radio New Zealand he was confident it would not fuel significant price rises in the Auckland housing market because the government was increasing the supply of homes.

"Look, it'll be at the margins. Interest rates actually have been very low in New Zealand -- they've been at 50-year lows for a very long period of time," Key said.

"So I suspect it'll help home owners but I'm not sure it'll do too much to accelerate the market."

Opposition politicians said the OCR cut was the right thing to do, but pressure was now on the government to resolve the housing crisis, particularly through moves to discourage investors from home and abroad.

"Despite the risk of pouring petrol on an overheated Auckland housing market by cutting interest rates, the weakness of the economy, wages and exports has forced the (RBNZ) governor to cut the OCR," finance spokesperson for the main opposition Labour Party, Grant Robertson, said.

"There could be catastrophic effects on the wider productive economy if -- on top of the loss of export earnings -- the Auckland housing bubble bursts," Robertson said in a statement.

The opposition Green Party warned that if the government's weak capital gains tax, to be implemented in October, failed to dampen the housing market, then more action would be needed to stop the housing bubble inflating further.

"The Reserve Bank has already used some of the limited tools at its disposal to try to dampen the demand from domestic investors, but it doesn't have the means to stop non-resident foreign buyers from continuing to cash in on Auckland's overcooked housing market- - that's the government's job," said Green finance spokesperson Russel Norman.

"Offshore demand for Auckland housing is a very deep bucket," Norman said in a statement. Endi