- Jane Turner, ASB senior economist
The market is pricing in almost a 50% chance on an interest cut by the Reserve Bank of New Zealand this Thursday amid a stronger Kiwi Dollar, the weak outlook for inflation, dairy and labour market. The central bank is widely expected to slash the official cash rate by 25 basis points to 2.5%, following three consecutive rate cuts between June and September. Internationally, New Zealand's OCR still remains one of the highest in the developed world.
Since the RBNZ's last lowered the cash rate on September 10, the New Zealand Dollar has climbed from 0.63 versus the US Dollar to around $0.67. The currency's strength makes New Zealand exports less competitive as well as dampens inflation by making imports cheaper. The annual inflation rate stood at 0.4% last quarter, being last within the target range of 1%-3% in the September quarter 2014. However, the gauge has not hit the central bank's 2% target midpoint in four years. Most economist predict that the RBNZ will be forced to cut the benchmark rate one more time in 2016, bringing OCR to 2.0%, thereby unwinding all of the 100 basis points which Governor Graeme Wheeler added to OCR during 2014.
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