8 May 2019

Reserve Bank cuts official cash rate to 1.5% for first time in two years

7:34 pm on 8 May 2019

The Reserve Bank (RBNZ) has cut its benchmark interest rate for the first time in more than two years as it tries to stimulate growth and protect against a slowing world economy.

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Reserve Bank governor Adrian Orr Photo: NZ Super Fund

The official cash rate (OCR) was cut by a quarter of a percentage point to 1.5 percent.

Governor Adrian Orr said the economy had been going through a soft patch with immigration slowing, business confidence, investment, and job growth weakening, while inflation remained below the RBNZ's target.

"Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates," Mr Orr said.

Reserve Bank governor Adrian Orr told RNZ the decision-making committee was split on whether a rate cut would push up the housing market but it did not stop them going ahead with it.

"We do expect to see the impulse from lower interest rates to come through spending and from investment activity, and part of that would be housing activity," he said.

For the past two years, the RBNZ has been signalling interest rates would be on hold for an extended period, probably well into 2020, but warned the balance of risks to the economy, inflation and the rest of the world was to the downside.

"However, there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising," Mr Orr said.

The central bank's forward projections for the cash rate implied there could be another rate cut by the end of the year or early next year, with no move upwards before late 2021.

The New Zealand dollar, which has been sitting around three-month highs recently, initially fell more than half a cent against the US dollar, before clawing back some ground to settle around 65.7 US cents.

Retail banks were quick to pass on some of the rate cut.

ANZ and Kiwibank passed on about half of the rate cut, lowering their floating and fixed lending rates by just over a tenth of a percentage point. But they also reduced deposit rates for lenders.

Westpac is the latest bank to cut its rates, with changes taking effect on Friday.

An economist said another rate cut would probably be needed but there was no pressing urgency for that to happen.

"The next move in the OCR will likely be data dependent, we have pencilled in August but feel the risks are skewed to a later move," ASB chief economist Nick Tuffley said.

The decision was the first from the RBNZ's new look monetary policy committee, which comprises four bank officials and three external members.