New Zealand snips rates as its rush for ‘white gold’ slumps


New Zealand cut in­ter­est rates for the first time in more than four years on Thurs­day amid nearstag­nant in­fla­tion and a slump in prices for its all-im­por­tant dairy ex­ports.

In an ag­gres­sive move de­signed to main­tain eco­nomic mo­men­tum and pre­vent any chance of a slow­down, the Re­serve Bank of New Zealand trimmed the Of­fi­cial Cash Rate (OCR) 0.25 points to 3.25 per­cent.

It also fore­shad­owed fur­ther cuts if the sit­u­a­tion failed to im­prove, send­ing the New Zealand dollar into a down­ward spi­ral on cur­rency mar­kets.

“A re­duc­tion in the OCR (of­fi­cial cash rate) is ap­pro­pri­ate given low in­fla­tion­ary pres­sures and the ex­pected weak­en­ing in de­mand, and to en­sure that medium term in­fla­tion con­verges to­wards the mid­dle of the tar­get range,” the bank said in a state­ment.

“We ex­pect fur­ther eas­ing may be ap­pro­pri­ate. This will de­pend on the emerg­ing data.”

While the rate cut did not sur­prise the mar­ket, its tim­ing did. Most econ­o­mists had ex­pected the bank to hold off for an­other few months.

TD Se­cu­ri­ties strate­gist An­nette Beacher said an­other rate cut ap­peared im­mi­nent.

“The mar­kets will shift to­wards a fol­low-up cut to 3.0 per­cent in July, but as it may be wiser to wait for more data, we’ll pen­cil in Septem­ber for now,” she said.

“By wait­ing a lit­tle longer this stretches out the eas­ing bias and pro­longs down­ward pres­sure on the NZD.”

First Cuts in 4 Years

The last time the bank cut in­ter­est rates was in March 2011, as an emer­gency mea­sure to pre­vent the econ­omy fal­ter­ing af­ter a dev­as­tat­ing earth­quake in Christchurch that killed 185 peo­ple.

The stim­u­lus this time was data show­ing an­nual in­fla­tion at 0.1 per­cent, a 15-year low and well be­low the bank’s tar­get of 1.0-3.0 per­cent.

The need to act was ex­ac­er­bated by a pro­longed dip in com­mod­ity prices, par­tic­u­larly dairy, which threat­ens to act as a damp­ener on the over­all econ­omy.

The im­por­tance of dairy to New Zealand’s econ­omy can­not be over­stated.

The South Pa­cific na­tion is the world’s largest dairy sup­plier, with the in­dus­try earn­ing in ex­cess of NZ$15.0 bil­lion ( US$10.6 bil­lion) a year and ac­count­ing for more than a third of its ex­ports.

But the so-called “white gold” has lost some of its lus­ter, with prices al­most halv­ing in the past year due to in­creased ex­ports from the United States and the re­moval of milk pro­duc­tion quo­tas in Europe.

The as­sump­tion has been that the mar­ket — driven by China’s bur­geon­ing mid­dle class — will sim­ply bounce back, but the Re- serve Bank said that had not yet hap­pened.

“The fall in ex­port com­mod­ity prices that be­gan in mid-2014 is prov­ing more pro­nounced,” it said.

“The weaker prospects for dairy prices and the re­cent rises in petrol prices will slow in­come and de­mand growth.”

Un­til now, the bank has been re­luc­tant to lower in­ter­est rates in case it fu­els run­away prop­erty prices in New Zealand’s largest city, Auck­land.

How­ever, it said loan re­stric­tions and a cap­i­tal gains tax on for­eign in­vestors in­tro­duced last month should help con­tain the city’s hous­ing mar­ket.

The rate cut sent the New Zealand dollar tum­bling from 72.00 U.S. cents to 70.09 U.S. cents, with Cap­i­tal Eco­nomics say­ing it could dip be­low 65.00 U.S. cents if the cen­tral bank’s es­ti­mate of 3.0 per­cent eco­nomic growth proves op­ti­mistic.

A weaker dollar would be wel­comed by Re­serve Bank gover­nor Graeme Wheeler, who has long com­plained the cur­rency is over­val­ued and hurt­ing ex­porters.

“A fur­ther sig­nif­i­cant down­ward ad­just­ment (in the New Zealand dollar) is jus­ti­fied,” he said when an­nounc­ing the rate cut.

“In light of the fore­cast de­te­ri­o­ra­tion in the cur­rent ac­count bal­ance, such an ex­change rate ad­just­ment is needed to put New Zealand’s net ex­ter­nal po­si­tion on a more sus­tain­able path.”

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