business

New Zealand rates at record low in ‘shock and awe’ cut

March 10, 2016

The Reserve Bank of New Zealand cuts its benchmark rate 0.25 percentage points to 2.25% and warned there could be more to come. – File pic, March 10, 2016. New Zealand unexpectedly slashed interest rates to a record low today in a "shock and awe" tactic, stunning financial markets and sending the kiwi currency tumbling.

The Reserve Bank of New Zealand (RBNZ) cuts its benchmark rate 0.25 percentage points to 2.25% and warned there could be more to come.

"Further policy easing may be required... we will continue to watch closely the emerging flow of economic data," Governor Graeme Wheeler said in a statement.

Wheeler had already cut rates four times since June last year and most analysts expected him to sit tight this month, with only two of 17 economists surveyed by Bloomberg predicting the move.

He said the country's struggling dairy industry, a deteriorating global outlook and flat-lining inflation expectations were behind the aggressive stance.

However, TD Securities head of Asia-Pacific research Annette Beacher said it was more a "shock and awe" tactic to lower the kiwi, which has remained stubbornly high despite the bank's repeated efforts to talk it down.

"It's currency led, despite denials," she said in a note to clients.

If so, the tactic worked, with the New Zealand dollar spiralling US$0.145 to US$0.6635 in the hours after the announcement.

Wheeler said in his statement that the exchange rate was 4% above projections made in December "and a decline would be appropriate given the weakness in export prices".

He has long complained that the high kiwi was hurting exporters, particularly in the crucial dairy sector which is in a slump as global milk prices plummet.

Capital Economics Australasia specialist Paul Dales said the currency could dip as low as 60 US cents if the bank followed up with another cut to make the base rate 2.0%.

"The RBNZ has clearly been spooked by recent weakening in the outlook for the global economy, unwanted strengthening in the New Zealand dollar and the plunge in various measures of domestic inflation expectations," he said.

New Zealand is the world's largest dairy exporter and global weakness could further hinder international demand for its mainstay commodity.

The South Pacific country shipped NZ$11.5 billion (RM32.136 billion) of dairy products in 2015, accounting for 17% of total exports.

But the giant farming cooperative Fonterra this week cut the price it pays for milk solids to a nine-year low of NZ$3.90 per kilogramme, less than half the NZ$8.65 paid at the height of a China-driven dairy boom two years ago.

Wheeler was also troubled by pessimistic expectations about inflation, which was just 0.1% in 2015, well below the bank's target of 1.0-3.0%.

"This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes," he said.

ANZ Bank said the base rate could go as low as 1.75% as the RBNZ looks to maintain growth and prevent the economy stalling.

Finance Minister Bill English on Wednesday downplayed the impact of the dairy industry's difficulties on the broader economy, saying it continued to grow at 2.0-3.0%. – AFP, March 10, 2016.