The Reserve Bank has delivered a huge surprise by cutting the the Official Cash Rate to 1.00% from 1.5% and says the lower rate was needed for it to continue to meet its employment and inflation objectives.
The Kiwi dollar immediately fell more than a cent against the American currency, from US65.6c to US64.3c.
A cut to the OCR was widely expected - but not by as much as was delivered.
"This was a stunning decision," Westpac chief economist Dominick Stephens said.
"In the history of the OCR, the only times the OCR has been cut by 50bps or more have been after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake.
"We are very surprised that the RBNZ decided to cut 50bps in today’s environment."
Stephens noted that there was no signal in the announcement about the likelihood of further cuts, and the published OCR projections bottomed out at 0.9%, implying only a small chance of a further OCR cut.
"The RBNZ appears to be trying to get ahead of the curve with today’s move."
The cut now takes our key interest rate down to the same as that in Australia - at 1%, though the Reserve Bank of Australia is widely expected to cut further soon.
A late decision?
And while the RBNZ has given no indication as such in its commentary, the decision to make a 50 basis point cut appears to have been a late one.
The full Monetary Policy Statement that accompanied the review gave a forward projection of the OCR for September 2019 of 1.4% - which suggests that at the time the document was put together a double cut to the rates was not being contemplated.
But developments on the global stage this week, with the ratcheting up of trade hostilities between the US and China, may have pushed things over the edge.
ANZ chief economist Sharon Zollner said a 25bp cut on Wednesday was "baked in" by both the market and analysts, but the proactivity of the RBNZ policy committee that was evident in May [when the OCR was cut to 1.5% from 1.75%] was to the fore again, "choosing to front-load the move and get maximum bang for their buck".
"Things could turn to custard before the September OCR review in seven weeks, but a lot of custard looks baked in already at this point," she said.
"...There are two schools of thought when nearly out of ammunition: hide behind a rock and preserve it, or charge. The RBNZ clearly falls in the latter camp."
Zollner said the "bold move" would result in lower retail borrowing rates that should support investment and the housing market, "but there will be offsetting impacts on the incomes and therefore spending of savers, and one also can’t rule out a perversely negative impact on confidence of what might look to some like a crisis-type response".
'Didn't see that coming'
BNZ's head of research Stephen Toplis was typically forthright: "Boy, didn’t see that coming! In hindsight, probably should have!"
He said "yet again", RBNZ Governor Adrian Orr (and his Monetary Policy Committee) had shown that they want to get “in front of the curve”.
"Rather than cut 25 basis points, and indicate that another rate cut was likely, they decided to not pussyfoot around and, instead, throw everything at the market at once. Thank goodness the employment data was so strong yesterday or goodness knows what they would have done!"
He said the biggest concern is that the Monetary Policy Committee continues to believe falling interest rates will drive growth higher in the same way that they have done in the past.
"In particular, they remain fixated with the idea that business investment will respond to the cuts that have now been made.
"We are far from convinced. It is our view that the cost of debt is not hindering investment activity in the slightest.
"And we consistently get feedback from business that lower interest rates will not foster heightened investment activity. The fact that input costs are rising (they will be rising more now) in an environment where they can’t increase output prices is resulting in downward pressure on profits. In addition, political and geopolitical concerns both here and offshore are creating significant uncertainty.
"Together these factors are what are crimping investment activity and a cut in interest rates is unlikely to solve the problem."
ASB chief economist Nick Tuffley said even after "the surprise size" of the cut, "the risks remain skewed to an even lower trough than the current 1% OCR".
"We forecast a further 25bp cut to 0.75%, in November. Global risks are moving relatively quickly, based on the past week’s US-China tensions, and the added Brexit uncertainty. Domestically, there may be more labour market slack than is evident by purely the (low) unemployment rate – and with that the scope to drive the economy, employment and inflation pressures harder," he said.
This is the full statement from the RBNZ:
The Official Cash Rate (OCR) is reduced to 1.0 percent. The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.
Employment is around its maximum sustainable level, while inflation remains within our target range but below the 2 percent mid-point. Recent data recording improved employment and wage growth is welcome.
GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.
Global economic activity continues to weaken, easing demand for New Zealand’s goods and services. Heightened uncertainty and declining international trade have contributed to lower trading-partner growth. Central banks are easing monetary policy to support their economies. Global long-term interest rates have declined to historically low levels, consistent with low expected inflation and growth rates into the future.
In New Zealand, low interest rates and increased government spending will support a pick-up in demand over the coming year. Business investment is expected to rise given low interest rates and some ongoing capacity constraints. Increased construction activity also contributes to the pick-up in demand.
Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level.
Summary record of meeting – August 2019 Statement
The Monetary Policy Committee agreed there was a need for further monetary stimulus to meet its inflation and employment objectives.
The Committee noted recent economic developments were broadly as expected and employment was around the targeted maximum sustainable level. The Committee was pleased to see that the labour market data held up relative to expectations in the June 2019 quarter.
However, the Committee noted that inflation remains below 2 percent and the outlook for employment and inflation was softer. GDP growth had slowed and global conditions had weakened.
The Committee agreed that the balance of risks to achieving its consumer price inflation and maximum sustainable employment objectives was tilted to the downside, although members placed different emphasis on the sensitivities to these risks.
The Committee noted the decline in long-term government bond yields to historically low levels. Financial market participants expect both inflation and policy interest rates to remain low globally for a prolonged period. Some members noted that survey measures of short-term inflation expectations in New Zealand had declined recently. Others were encouraged that longer-term expectations remained anchored at close to 2 percent.
The Committee agreed that weak global economic conditions could see imported inflation remain low if global growth slows further or if commodity prices decline. The members discussed the range of appropriate policy responses should imported inflation persist at low levels.
The Committee welcomed the recent employment and wage data but noted that private sector wage growth was subdued despite businesses having difficulty finding labour. The members discussed that the recent slowdown in growth could dampen wage inflation by more than assumed. Some noted that if cost pressures remain elevated, firms may pass on costs to consumer prices by more than assumed, while others viewed the wage pass through as a natural consequence of a tight labour market and policy stimulus.
The members discussed the recent slower domestic GDP growth and the impact of slowing global demand on New Zealand through the trade, financial and confidence channels. The members noted that heightened global uncertainty was reducing investment and suppressing trading-partner growth. This highlighted the risk of a larger or more prolonged slowdown in global economic growth.
The Committee noted that additional stimulus from central banks had underpinned growth and reduced the likelihood of a more-pronounced slowdown. However, some thought that even with support from monetary stimulus, considerable economic and policy uncertainty could see global growth continue to decline. Other members noted that the easing in global financial conditions since the beginning of the year, or a shift in political environment, could lead to a pick-up in global growth over the next year.
The Committee acknowledged the importance of additional spending from households, businesses, and the government, to meet their inflation and employment targets. They also agreed that additional monetary stimulus was needed. The members discussed several important uncertainties.
The Committee noted that low business confidence had dampened business investment in 2018 and had remained weak in mid-2019. The members discussed that if sentiment remained low, perhaps due to global economic conditions or if profitability remains squeezed, growth might not increase as anticipated over the medium term. The members also noted that the shift in domestic production from manufacturing towards services was also dampening business investment.
The outlook for household spending was discussed with regard to the assumed dampening impact of soft house price inflation. Some members noted lower mortgage rates could contribute to a stronger pick-up in house price inflation, which could support consumption. Other members noted that house price inflation could remain weak, for example if net immigration continued to decline relative to the number of new houses being constructed.
The Committee noted that fiscal assumptions embedded in the projections were consistent with Budget 2019, which included adjustments to reflect that government spending takes time to increase. The members discussed that fiscal policy could be more supportive if future announcements incorporate more spending or if the impact on domestic demand is larger than assumed. This view was balanced by the impact of any increase in government spending being delayed, for example due to timing of the implementation of new initiatives and difficulty finding labour.
The Committee also discussed the contribution of monetary policy to the projected pick-up in growth and inflation. The members noted that estimates of the neutral level of interest rates have continued to decline and this was consistent with generally lower interest rates over time. Members also noted the Bank’s current assessment of analysis on the transmission from monetary policy to growth and inflation. This suggested that the overall strength of these relationships was little changed in the environment of low interest rates.
The Committee agreed to continue to monitor and assess the impacts of monetary policy, including the transmission through to retail interest rates.
The Committee reached a consensus that, relative to the May Statement, a lower path for the OCR over the projection period was appropriate. The lower OCR path reflected the economic projections and the balance of risks discussed.
The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.