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Surprise interest rate cut comes with warning for New Zealand economy

Xinhua, March 10, 2016 Adjust font size:

Farmers in New Zealand's hard-pressed dairy sector and manufacturers welcomed the unexpected cut in interest rates Thursday, while analysts warned the central bank move heralded stormy economic waters ahead.

The Reserve Bank of New Zealand (RBNZ) cut its official cash rate from 2.5 percent to an historic low of 2.25 percent earlier in the day and indicated further cuts were imminent.

Inflation expectations were falling and at risk of becoming "self-fulfilling," while the outlook for global growth had deteriorated and commodity prices remained low, RBNZ governor Graeme Wheeler said.

The Federated Farmers industry group said the cut could be the difference between sinking or swimming for many dairy farmers who had their forecast payout slashed yet again this week.

"Farmers' cash flow is tight at the moment, particularly in the dairy sector, and anything that can ease the pressure on their bottom line will help get as many dairy farmers as possible through the current season," Federated Farmers president William Rolleston said in a statement.

"This cut in the official cash rate should also take pressure off the dollar, which is vital for our farming sector."

The New Zealand Manufacturers and Exporters Association (NZMEA) also noted the effect on the exchange rate would make New Zealand goods more competitive.

"The currency has remained stubbornly high, despite continued downward pressure on commodity prices," NZMEA chief executive Dieter Adam said in a statement.

"The surprise of the decision helped to move the currency down further than we have seen in other recent OCR cuts."

An Economic Note from the ASB Bank said the cut "was a prudent decision given the looming risks of inflation remaining stubbornly low."

A further cut of 25 basis points was likely, probably about June, it said.

Headline inflation has been tracking at 0.1 percent, well below the RBNZ's target range of 1 percent to 3 percent.

Opposition lawmakers called on the government to stop relying on record immigration to support economic growth and to begin stimulus measures.

"The cut to the OCR shows the economy is in need of stimulus, with growing concerns about dairy, the international economy, and the housing market. Current growth is being driven by short-term, non-sustainable factors like migration," said Grant Robertson, finance spokesperson for the main opposition Labour Party.

"Hopefully the OCR cut will encourage investment and growth, but the move needs support from the government to help deliver long-term economic development," Robertson said in a statement. Endit