NZ's central bank stuns markets with 50-bp rate cut

NZ's central bank stuns markets with 50-bp rate cut

The main entrance to the Reserve Bank of New Zealand in central Wellington. (Reuters file photo)
The main entrance to the Reserve Bank of New Zealand in central Wellington. (Reuters file photo)

WELLINGTON: New Zealand's central bank stunned markets on Wednesday by cutting the official cash rate (OCR) by a bigger-than-expected 50 basis points to a record-low 1.00%, and looked set to keep policy lower for longer in the face of growing economic risks.

The surprise move by the Reserve Bank of New Zealand (RBNZ) sent the kiwi dollar tumbling to a more than 3-1/2-year trough, also dragging its Australian cousin lower.

The kiwi dollar lost a sizable 2% to $0.6378, a level not seen since early 2016 and the largest one-day percentage drop since late March, and comes after the Trump administration labelled China a currency manipulator in a dramatic escalation of the Sino-US trade war.

"The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives," RBNZ's monetary policy committee said in a statement accompanying its rates decision.

"GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets," the statement said.

The central bank lowered its cash rate by 25 basis points (bps) in May as international trade frictions clouded the growth outlook, and economists polled by Reuters had predicted policymakers would cut rates again this week by a quarter of a percentage point.

The New Zealand dollar tumbled 1% to $0.6443, a 10-month low, and bond yields slumped after the rates decision as markets priced in further easing, possibly as early as next month.

RBNZ's forecasts released with the statement show another cut is possible by the end of the year which would take the OCR below 1%.

The closely correlated Australian dollar fell to its lowest since 2009 on Wednesday on expectations the Reserve Bank of Australia will follow the RBNZ's example. 

New Zealand's move follows rate cuts by global policymakers who have been forced to inject more stimulus as fears grow over the broadening fallout of the US-China trade dispute on the global economy.

And events this week rang more alarm bells for policymakers, as the trade war took a dramatic turn for the worse on Monday after the US government labelled China a currency manipulator for the first time since 1994.

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