Chief economist update: Expect an RBNZ rate cut

The Reserve Bank of New Zealand (RBNZ) did as it was expected - it kept the official cash rate unchanged at a record low 1.5% at the conclusion of its June 26 meeting.

Understandably, another interest rate reduction only a month after it handed out a 25 basis point cut at its May board meeting could be counter-productive, indicating a sense of urgency (if not, panic) on the domestic economic outlook.

Then again, the RBNZ board thinks: "Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives"

According to the policy statement: "Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending."

"The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels."

While New Zealand's unemployment rate has fallen from 4.3% in the December 2018 quarter to 4.2% in the March 2019 quarter - close to the 10-year low of 4% recorded in September last year - the country's inflation rate had been decelerating further away from its 1%-3% target.

Headline CPI inflation eased to 1.5% in the year to the March quarter from 1.9% in the previous period. Core CPI inflation steadied at 1.5%.

Congruent with the current unemployment-inflation dynamics of most other developed nations, the RBNZ noted: "The subdued nominal wage growth in the private sector and the apparent disconnect from indicators of capacity pressure in the labour market ... the continuing absence of wage pressure could indicate there is still spare capacity in the labour market."

The NZ$'s renewed strength is also putting downward pressure on domestic inflation. According to the 'Summary Record of Meeting [26 June 2019] report: "Some members noted that lower commodity prices and upward pressure on the New Zealand dollar could see imported inflation remain soft."

The annual growth in New Zealand's import prices nearly halved to 3.6% in the year to the March quarter from 7.1% in the December 2018 quarter.

The NZ$/US$ exchange rate has now rebounded by 2.8% to US$0.6681 (back to pre-May 2019 rate cut levels) after it dropped to a seven-month low following the RBNZ's rate cut announcement in May on mounting speculations  the US Federal Reserve would cut interest rates this year.

Read more: Reserve Bank of New Zealand
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