Hive News Alert: RBNZ cuts 25 bps as expected and sees one more cut this year

The Reserve Bank has cut its Official Cash Rate by a further 25 basis points to 2.75% as universally expected and has lowered its forecast for short term interest rates to imply one more 25 basis point cut later this year.

However, the central bank did include one potential scenario in Box D of its September quarter Monetary Policy Statement where a weaker global economy would force three more cuts to as low as 2.0% over the next year.

Graeme Wheeler said domestically generated inflation was below average and capacity pressures were expected to ease modestly in coming quarters because of a fall in GDP growth to just over 2% from over 3% a year ago.

"A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2% target midpoint," Wheeler said. "At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data," he said.

Wheeler said lower interest rates and a lower exchange rate were expected to underpin a pick-up in growth and inflation from 2016. GDP growth was expected to rebound to slightly over 3% by early 2018.

He said the bank had revised its growth forecasts lower because of concerns about softer growth in emerging economies, particularly in China and East Asia.

"Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate," Wheeler said.

"Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence," he said.

"Several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar."

NZ$ depreciation needed

Wheeler said further depreciation in the New Zealand dollar was appropriate, "given the sharpness of the decline in New Zealand’s export commodity prices."

The warning about further falls was softer than his previous comments about the need for a substantial depreciation and that the currency had been unsustainably and unjustifiably high. Those key phrases were not included in today's statement.

Slower house price inflation seen

Wheeler said house prices in Auckland were becoming unsustainable. The bank forecast house price inflation would ease steadily as new supply came on stream, but it said it did not assume a sharp house price adjustment.

"Residential construction is increasing in Auckland, but it will take some time to correct the imbalances in the housing market," he said.

Wheeler expected headline inflation to return well within the 1-3% target range by early 2016 "as the earlier petrol price decline drops out of the annual inflation calculation, and as the exchange rate depreciation passes through into higher tradables prices."

Although he noted: "Considerable uncertainty exists around the timing and magnitude of the exchange rate pass-through."

We'll have more detail and reaction in tomorrow morning's email.