New Zealand Cuts Rates to Fight Off Deflation

Daily Analysis - 10/03/2016

New Zealand Cuts Rates to Fight Off Deflation

As New Zealand’s consumer price inflation persists near the deflationary threshold, central bank policymakers opted to provide more stimulus to the economy. The Reserve Bank of New Zealand, in an unexpected move, slashed interest rates to record low values while also emphasizing their willingness to act further if inflation still appears subdued.

UK Industrial Production Resurgence

Industrial production in the United Kingdom rebounded in January as the Office for National Statistics reported monthly growth of 0.30% after having contracted the previous 2 months. The value came in higher than December’s -1.10% but missed expectations of 0.50%. The boost came specifically from manufacturing, climbing from the prior month’s revised value of -0.30% to 0.70% in January. Although a positive result, analysts anticipate that the rebound will be short lived with the sector facing pressure from shrinking global demand and weak energy prices impacting North Sea oil and gas production. Adding to the risks to the outlook is a possible exit from the European Union in June, potentially leading foreign manufacturers to relocate due to taxation issues. The Pound moved slightly higher versus the US dollar over the session, continuing its climb and reaching a price of 1.4240 before retreating.

Reserve Bank of New Zealand Cuts Rates by 25 Basis Points

Bank of Canada Leaves Rates Unchanged

In an unexpected move by the Reserve Bank of New Zealand, central bank governor Graeme Wheeler along with his board members opted to cut interest rates by 25 basis points, dropping the benchmark from 2.50% to 2.25%. Problems with restoring inflation combined with the growing uncertainty of the Chinese economy is broadly impacting countries across the Asia-Pacific region. Weak commodities prices and volatile financial markets have seen rising anxiety among central bank officials concerned about the domestic economic outlook. The developments are reflected by the country’s consumer price index rapidly approaching deflationary territory, with the governor once again reiterating that the central bank is willing to intervene further with additional stimulus in order to help boost inflation. The New Zealand dollar slumped on the announcement, falling as low as 0.6619 versus the US dollar before bouncing.

Chinese Inflation Jumps in February

The Bank of Canada chose to leave monetary policy unchanged in the latest meeting, with interest rates kept at 0.50%. The BoC will wait and see what the government has planned from a fiscal stimulus perspective in its forthcoming federal budget that will be announced on March 22^nd before planning and preparing additional monetary stimulus. The decision by policymakers to maintain rates reflected Deputy Governor Timothy Lane’s earlier statements on the fact that a cut in rates could worsen existing vulnerabilities, especially in relation to housing debt and inflation. Governor Stephen Poloz stressed that headwinds arising from the global economy have been mirrored in the local economy with low oil prices contributing to enduring weakness in the Canadian dollar that has created temporary upward inflationary pressures. Nevertheless, the efforts undertaken by the central bank have been effective at keeping the economy afloat despite troublesome internal and external conditions.