- Graeme Wheeler, RBNZ Governor
The Reserve Bank of New Zealand unexpectedly lowered interest rates and signalled that more cuts are on the cards. The move was first reduction in the rate since January 2011 and aimed to boost inflation, which has been pressured by sharply lower terms of trade and the economy's growing supply potential. The RBNZ cut its official cash rate by 25 basis points to 3.25%. The central bank hoped that cuts in borrowing costs would push the nation's currency lower and fuel inflation from near zero to its 2% goal next year. In the first quarter inflation stood at 0.1%, well below the RBNZ's medium-term target band of 1-3%. Weak prices pressures have been driven mostly by tradables inflation, which has been suppressed by a strong New Zealand Dollar and low global inflation. Dairy prices have plummeted more than 50% from a high in early 2014, considerably reducing dairy farmers' incomes and the terms of trade. The RBNZ projects that the decline in prices will deduct $7 billion from the economy this season, translating into a fall of around 3% of nominal GDP. Reserve Bank governor Graeme Wheeler said in the accompanying statement that the New Zealand economy was growing at an annual rate around 3%, propped up by low interest rates, high net migration and construction activity, and the drop in fuel prices. Yet, he warned that the decrease in export commodity prices that began in mid-2014 appeared to be more devastating, and was a key factor behind the central bank's decision.
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