New Zealand cuts rates as rush for 'white gold' stalls

New Zealand cut interest rates for the first time in more than four years on Thursday amid near-stagnant inflation and a slump in prices for its all-important dairy exports.

In an aggressive move designed to maintain economic momentum and prevent any chance of a slowdown, the Reserve Bank of New Zealand trimmed the Official Cash Rate (OCR) 0.25 points to 3.25 percent.

It also foreshadowed further cuts if the situation failed to improve, sending the New Zealand dollar into a downward spiral on currency markets.

"A reduction in the OCR (official cash rate) is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range," the bank said in a statement.

"We expect further easing may be appropriate. This will depend on the emerging data."

While the rate cut did not surprise the market, its timing did. Most economists had expected the bank to hold off for another few months.

TD Securities strategist Annette Beacher said another rate cut appeared imminent.

"The markets will shift towards a follow-up cut to 3.0 percent in July, but as it may be wiser to wait for more data, we'll pencil in September for now," she said.

"By waiting a little longer this stretches out the easing bias and prolongs downward pressure on the NZD."

- 'White gold' loses shine -

The last time the bank cut interest rates was in March 2011, as an emergency measure to prevent the economy faltering after a devastating earthquake in Christchurch that killed 185 people.

The stimulus this time was data showing annual inflation at 0.1 percent, a 15-year low and well below the bank's target of 1.0-3.0 percent.

The need to act was exacerbated by a prolonged dip in commodity prices, particularly dairy, which threatens to act as a dampener on the overall economy.

The importance of dairy to New Zealand's economy cannot be overstated.

The South Pacific nation is the world's largest dairy supplier, with the industry earning in excess of NZ$15.0 billion (US$10.6 billion) a year and accounting for more than a third of its exports.

But the so-called "white gold" has lost some of its lustre, with prices almost halving in the past year due to increased exports from the United States and the removal of milk production quotas in Europe.

The assumption has been that the market -- driven by China's burgeoning middle class -- will simply bounce back, but the Reserve Bank said that had not yet happened.

"The fall in export commodity prices that began in mid-2014 is proving more pronounced," it said.

"The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth."

Until now, the bank has been reluctant to lower interest rates in case it fuels runaway property prices in New Zealand's largest city, Auckland.

However, it said loan restrictions and a capital gains tax on foreign investors introduced last month should help contain the city's housing market.

The rate cut sent the New Zealand dollar tumbling from 72.00 US cents to 70.09 US cents, with Capital Economics saying it could dip below 65.00 US cents if the central bank's estimate of 3.0 percent economic growth proves optimistic.

A weaker dollar would be welcomed by Reserve Bank governor Graeme Wheeler, who has long complained the currency is overvalued and hurting exporters.

"A further significant downward adjustment (in the New Zealand dollar) is justified," he said when announcing the rate cut.

"In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand's net external position on a more sustainable path."
Source: AFP