Reserve Bank announce drop to OCR (11/06/2015)

New Zealand is currently experiencing low inflation at the moment, and many commentators have been calling for a lowering of the Official Cash Rate. Other contributing factors include weak dairy prices, declining business and consumer confidence and following additional measures to curb Auckland’s bubbling housing market.

Since the start of 2015 there has been a gradual easing with fixed rates being offered from the banks. This time last year the predictions were that fixed rates might be in the mid six per cent range, but they are currently in the low five per cent range.

The Reserve Bank announced today that they were dropping the OCR to three and a quarter percent.

The effect of this announcement, will be seen over the coming days. It is expected that the banks will now lower their floating rates by a quarter percent. Some of the shorter term fixed rates have come down as a result of this, but the fixed rates are affected by many factors.

The tone of the Reserve Bank message indicates that further easing may come later in the year.

Their full release is below:

NEWS RELEASE
11 June 2015
Official Cash Rate reduced to three and a quarter per cent

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to three and a quarter percent.
Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased.

The New Zealand economy is growing at an annual rate around three percent, supported by low interest rates, net migration and construction activity, and the decline in fuel prices. However, the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed.
Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued.

With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.

House prices in Auckland continue to increase rapidly, and increased supply is needed to address this. The proposed LVR measures and the Government’s tax initiatives planned for 1 October 2015 should ease the impact of investor activity.
A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range.

We expect further easing may be appropriate. This will depend on the emerging data.