Roundup: Monetary policy under fire as New Zealand central bank cuts interest rate

Lawmakers on Thursday called for a review of New Zealand's monetary policy after an interest rate cut by the central bank appeared to backfire.

The Reserve Bank of New Zealand (RBNZ) cut the official cash rate by 25 basis points to a record low 2 percent, with governor Graeme Wheeler saying the overvalued New Zealand dollar had to fall if struggling exporters were to gain any traction amid low inflation expectations and an uncertain global economy.

However, within five minutes of the announcement the currency had climbed from 72.13 U.S. cents to 72.93 U.S. cents, at one point spiking at 73.40 U.S. cents.

Analysts pointed out that while the official cash rate (OCR) was at a record low, it still remained relatively high compared with other currencies, including the U.S. and Australian dollars.

The RBNZ has also had its hands tied with what Wheeler described as "a rapid escalation in house prices" that is stoking existing concerns about financial stability.

The housing crisis in the biggest city of Auckland -- home to a third of the population -- is rippling into neigboring regions, where prices have also begun to rise worryingly.

The fear of fueling house price rises -- and increasing the financial risks -- with interest rate cuts means the RBNZ is struggling to raise inflation from close to zero to within its target band of 1 percent to 3 percent.

Wheeler left the door open Thursday to further imminent cuts it the official cash rate and analysts believe the RBNZ will shave off another 25 basis points this year.

The ASB Bank said in an economic update that it expected the RBNZ to make the cut in November, although it could come forward to next month if the exchange rate remained high.

"In addition, the risks remain skewed to a lower OCR than 1.75 percent, particularly if the NZ dollar persists above the RBNZ's (new) assumed level or inflation expectations weaken," said the update.

Opposition lawmakers said the RBNZ was powerless to influence the exchange rate, a housing bubble and low inflation when its main tool was the OCR.

The main opposition Labour Party said reaction to the cut showed the monetary policy seemed to be "broken" with its focus on inflation targets.

The RBNZ was effectively ignoring the targets indicating "there is an urgent need to review monetary policy," Labour Party finance spokesperson Grant Robertson said in a statement.

"The immediate lift in the exchange rate following today's announcement, and the indications from trading banks that they will be passing on only a fraction of the cut, raises further questions about the limitations of monetary policy," said Robertson.

"The government has failed to fix the housing crisis in terms of either supply or demand, and some banks have decided to take matters into their own hands."

With nationwide house inflation for the year to July hitting a record 26 percent, the cut in the OCR would only fuel the house-buying speculation.

The OCR cut also fueled calls for a ban on non-residents buying New Zealand homes and measures such as a comprehensive capital gains tax on properties aside from the family home in order to deflate the housing bubble.

"But in the absence of any meaningful action on the economy from the Minister of Finance, the Reserve Bank has been left to do what it can with the OCR -- and that is now about as useful as a blunt axe," leader of the opposition New Zealand First party Winston Peters said in a statement.

"The Reserve Bank has used up most of its fire-power." Endit