- RBNZ Governor Graeme Wheeler
The Reserve Bank of New Zealand stunned markets by cutting the official cash rate and said that further easing may be required to help offset a recent decline in inflation expectations and help faltering dairy sector amid weak global economic background. The RBNZ lowered the country's cash rate by 25 basis points, taking it to a record low of 2.25%. In a statement, the central bank said the outlook for the world's economy had deteriorated since December, due to slower growth in China and Europe. The surprised decision came just five weeks after Governor Graeme Wheeler's speech in which he signalled no rush to ease further in response to weak inflation. The New Zealand Dollar slumped more than 1 US cent following the rate cut, which financial markets had assigned a 30% probability. Most economists now expect a second reduction in the OCR in June.
Headline inflation climbed just 0.1% in the December quarter, according to Statistics New Zealand, the weakest annual increase in the price level since 1999. Mr Wheeler said the main reason inflation was so weak was due to ongoing decline in fuel prices and low imports prices. The central bank is worried that weak inflation will influence firms' price and wage setting behaviour. A key risk to the nation's economy remains the dairy sector, where export commodity prices remain some 55% lower than their 2014-peak.
© Dukascopy Bank SA