New Zealand Eases Further

Market Trends - 10/12/2015

In its latest decision, the Reserve Bank of New Zealand under the stewardship of Governor Graeme Wheeler cut the official cash rate by an additional 25 basis points to 2.50% in response to further softening of prevailing economic conditions. On the heels of additional stimulus measures from the European Central Bank, this accommodation from the RBNZ echoes developments in most advanced economies just as the US Federal Reserve intends to deviate from easing, moving forward with tightening as it prepares for a likely interest rate hike next week. The RBNZ has steadily reduced rates over 2015, with the key rate declining 25 basis points in June followed by similar measures in July, September and now December. Current fundamental indicators such as the headline consumer price index remain well below the targeted range of 1.00% to 3.00%. However, according to Governor Wheeler, the measures taken are sufficient enough to return inflation to its target with expectations of the goal being hit by early 2016 after having revised projections.

Disinflation has been a substantial determinant of policy over the last year and will continue to play an important role in the future of policy with forecasts showing expectations of 1.20% in the first quarter and predictions showing it will reach the middle of the targeted range by the fourth quarter of 2017. In a positive sign, GDP forecasts were revised higher to 2.40% from 2.20% for the first quarter of 2016 and expected to reach 3.10% by the first quarter of 2017 compared to an earlier estimate of 2.80%. Governor Wheeler also remarked that policymakers are prepared to meet their mandate with rates at current levels, although they are ready to reduce rates again if needed. Although the economy has struggled this year amid falling international dairy prices and volatility in China, the scope for further policy adjustment remains high. Furthermore, Governor Wheeler anticipates economic activity to strengthen in 2016 due to a recent lift in confidence and more resilient consumer demand as immigration encourages population growth.


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