- Reserve Bank of New Zealand
The New Zealand Dollar dropped almost 1.5% after the Reserve Bank of New Zealand slashed interest rates for the third time this year to cushion the nation's economy amid weak dairy prices and softness in construction. The reduction in the benchmark rate to 2.75% was widely anticipated and came as no surprise. The central bank raised the official cash rate four times in 2014, encouraged by increasing Asian demand for its dairy products, a booming housing market in Auckland, New Zealand's largest city, and the need for post-earthquake reconstruction in Christchurch. However, New Zealand's economy started to slow, inflation eased and dairy prices tumbled. Inflation is currently running at 0.4%, well below the RBNZ's target of 1% to 3% while dairy prices are now around 60% below compared with where they were in early 2014. Business and consumer sentiment has plunged and growth is slowing.
Moreover, the RBNZ's forecasts suggest at least one more rate cut in the coming months. However, it also opened the door to much steeper rate cuts in case global economic conditions weaken further or if El Niño weather conditions have a significant negative impact. RBNZ governor Graeme Wheeler noted that the domestic economy was growing at an annual rate of 2%, compared with 2.5% when the bank last cut rates.
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