NZ Reserve Bank slashes cash rate, retailers rejoice
The Reserve Bank of New Zealand has reduced the official cash rate by 25 basis points to 5.25 per cent, with retailers welcoming the move.
In a statement, the RBNZ confirmed annual consumer price inflation is returning to within the Monetary Policy Committee’s 1 to 3 per cent target range.
“Surveyed inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures are moving consistent with low and stable inflation,” the statement read.
“Economic growth remains below trend and inflation is declining across advanced economies. Some central banks have begun reducing policy interest rates. Imported inflation into New Zealand has declined to be more consistent with pre-pandemic levels.”
RBNZ added that services inflation remains elevated is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity.
“Consumer price inflation in New Zealand is expected to remain near the target mid-point over the foreseeable future. The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target.
Retail NZ welcomed the first interest rate cut after eight consecutive cash rate pauses, adding that the latest economic news has shown that with increasing unemployment and inflation continuing to fall it was widely expected by economists that the Reserve Bank could cut the Official Cash Rate today.
According to the peak body, its retailers have been hurting over the last 12 months. The most recent Retail NZ Retail Radar Survey found that 71 per cent of members advised that they did not meet sales targets in the last quarter and 42 per cent indicated that they were not confident they would still be trading in 12 months’ time.
“We are hopeful that this announcement today will turn around consumer confidence, which has been at prolonged low levels over the last couple of years, which in turn will help retailers, who have been suffering a continued downturn in sales,” Retail NZ CEO Carolyn Young says.
“It’s welcome news for the wider economy and hopefully we will see an uptick before Christmas.”
Inside the decision
According to the RBNZ committee the weakening in domestic economic activity observed in the July Monetary Policy Review has become more pronounced and broad-based.
“Headline inflation has declined, and business inflation expectations have returned to around 2 percent at medium- and longer-term horizons. Committee members agreed that monetary policy restraint can now begin to ease. The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point.”
Alongside domestic movements, global growth remains below trend across advanced economies according to RBNZ.
“Growth in China has been softer than expected, due to a depressed property market and weak consumer demand. While US growth has been firm, some indicators show emerging weakness. Recent volatility in global asset markets reflects nervousness about US economic prospects, geopolitical risks, and the outlook for international trade policy.”
The committee added that global inflation has continued to decline but remains elevated in some parts of the services sector in many countries. Some central banks have recently begun cutting policy interest rates, reflecting lower core inflation, weaker activity, and softer labour markets.
RBNZ claimed the New Zealand economy and near inflation indicators now resemble those in countries in which central banks have started cutting policy rates.
“While official economic statistics have evolved in line with expectations in the May Monetary Policy Statement, a broad range of high-frequency indicators point to a material weakening in domestic economic activity in recent months. These include various survey measures of business activity, electronic card transactions, vehicle traffic, house sales, filled jobs, and job vacancies.
“These indicators collectively provide a consistent signal that the economy contracted in recent months. The output gap is now assessed to be more negative than was assumed in the May Monetary Policy Statement, indicating increased spare capacity.
“The committee discussed possible reasons for the current economic weakness. Alongside restrictive monetary policy, an earlier or larger impact of tighter fiscal policy could be constraining domestic demand. Falling net migration may also be playing a role. The committee noted that measurement challenges, including methodological changes by Statistics New Zealand in the national accounts, are creating additional uncertainty around the composition and likely persistence of this weakness.”