Dollar drops sharply on hints of rates cut
Spread of house-price inflation to regions worrying, writes Hamish Rutherford.
The Reserve Bank says interest rate cuts are ‘‘likely’’ as inflation continues to track below target.
In a hastily arranged economic update, the central bank said the world economy was weakening, the currency needed to be weaker and strong migration was being offset by weak dairy prices.
ASB said yesterday’s statement suggested the Reserve Bank would cut the official cash rate (OCR) next month and again in November, to 1.75 per cent. The current 2.25 per cent benchmark interest rate is already an all-time low.
This would likely mean cheaper mortgages for homeowners, but the returns on deposits would also drop.
Even though the market was already expecting Wheeler would cut interest rates in August, the New Zealand dollar dropped sharply on the news, down US0.65c to US69.6c, a six-week low.
‘‘House price inflation remains excessive and has become more broadbased across the regions, adding to concerns about financial stability,’’ Reserve Bank governor Graeme Wheeler said.
‘‘The bank is currently consulting on stronger macro-prudential measures aimed at mitigating risks to financial stability from the current boom in house prices.’’
Meanwhile, the Reserve Bank said the exchange rate, on an trade-weighted basis, was 6 per cent higher than it expected back in June, adding pressure to the dairy and manufacturing sectors and holding down inflation.
‘‘This makes it difficult for the bank to meet its inflation objective. A decline in the exchange rate is needed.’’
Wheeler said the outlook for inflation – 0.4 per cent in the year to June 30 – was weaker than expected back in June.
This was likely to force the bank to lower the cost of borrowing, in a bid to get inflation into the 1-3 per cent target band.
‘‘Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.’’
ASB senior economist Jane Turner said Wheeler’s statement that the exchange rate ‘‘needed’’ to be lower pointed to the potential for significantly lower interest rates.
‘‘This suggests the RBNZ has opened the door to OCR cuts below 2 per cent, a move the RBNZ had previously indicated a very high threshold for doing so,’’ Turner said.