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1st Ld-Writethru: New Zealand central bank cuts interest rate to 2 percent

Xinhua, August 11, 2016 Adjust font size:

The Reserve Bank of New Zealand (RBNZ) cut 25 basis points off its official cash rate Thursday, saying the New Zealand dollar was still overvalued while inflation remained stubbornly low.

RBNZ governor Graeme Wheeler said the rate had been cut to 2 percent, citing uncertain global growth amid unprecedented levels of monetary stimulus and heightened "political risks".

Weak global conditions and low interest rates abroad were placing upward pressure on the New Zealand dollar exchange rate, Wheeler said in a statement.

"The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradable sector," said Wheeler.

This made it difficult for the RBNZ to meet its inflation target, which sits in a band from 1 percent to 3 percent.

"A decline in the exchange rate is needed," he said.

Annual consumer price index inflation was expected to weaken in the September quarter, driven down in part by lower fuel prices, but was expected to rise from the December quarter.

"Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations," he said.

House price inflation was adding to concerns about financial stability as it spread beyond the largest city of Auckland - home to a third of the population - and into surrounding regions.

The RBNZ was consulting on stronger macro-prudential measures that should help to mitigate financial system risks arising from the rapid escalation in house prices.

Domestic growth was expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.

However, low prices were depressing incomes in the pillar dairy sector and reducing farm spending and investment, while high net immigration was supporting strong growth in labor supply and limiting wage pressure.

Wheeler left the door open for further interest rate cuts in the near future, saying they would be needed to ensure future inflation settled near the middle of the target range.

Thursday's cut was the second cut of 25 basis points this year, and analysts have predicted a third before the year is out.

However, the RBNZ has been wary of cutting interest rates, despite inflation tracking near zero, for fear of fueling house price inflation. Endit