(Bloomberg) -- New Zealand’s central bank said it’s now more likely to cut interest rates amid slowing global growth and downside risks to the inflation outlook, sending the kiwi dollar tumbling.
“Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,” Reserve Bank Governor Adrian Orr said in a statement in Wellington Wednesday after leaving the official cash rate at a record-low 1.75 percent. “Core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.”
A report last week showed the economy expanded just 0.9 percent in the second half of 2018, adding to signs that inflation will stay below the midpoint of the bank’s 1-3 percent target range. Central bankers around the world are becoming more cautious about growth and inflation. The Federal Reserve has signaled it may not raise rates this year, while the Reserve Bank of Australia has abandoned its tightening bias.
“The global economic outlook has continued to weaken,” said Orr. “This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.”
New Zealand’s dollar slumped 1.5 percent after the statement as traders fully priced in a rate cut for later this year. It bought 68.23 U.S. cents at 2:48 p.m. in Wellington from 69.15 cents immediately before the release.
Traders now see a rate reduction by November as almost certain, according to swaps data, up from a 48 percent chance earlier Wednesday.
“We have mounting concern that growth will not pick up sufficiently quickly to drive inflation pressures up, particularly as business confidence started the year on a softer tone,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “If the economy doesn’t start showing greater signs of life soon then the RBNZ could conceivably cut as early as May.”
In February, the RBNZ projected a rate increase in the first quarter of 2021 and lowered its forecasts for inflation, saying it now expects prices to rise just 1.4 percent in 2019.
“We will keep the OCR at an expansionary level for a considerable period to contribute to maximizing sustainable employment, and maintaining low and stable inflation,” Orr said in the eight-paragraph statement on Wednesday.
Orr said that the RBNZ still expects low interest rates and government spending to support economic growth and that, as capacity pressures build, inflation is likely to pick up.
However “the balance of risks to this outlook has shifted to the downside,” he said. “The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending.”
(Updates with economist quote in 7th paragraph.)
