It was widely expected, but it’s still an extraordinary thing to happen 10 years into an economic expansion. Interest rates are being cut at a time when unemployment is near record lows and house prices are still rising in most cities outside of Auckland.
Yet the Reserve Bank had to do it to get inflation up to near the middle of its target band of 1-3 percent and to meet its new target of supporting maximum sustainable employment.
The Reserve Bank announced it had cut the Official Cash Rate to a record low 1.5 percent from 1.75 percent, with the potential for more cuts if weaker global economic growth and slower-than-expected Government capital spending softens demand from consumers and investors.
The cut was not a complete surprise. Financial markets were pricing in a 50 percent chance of a cut to 1.50 percent after Governor Adrian Orr signaled at the end of March that he was biased towards a cut. A majority of economists were also expecting a cut.
It brings New Zealand’s OCR into line with Australia’s and was the first move under Governor Adrian Orr since his appointment in March last year. It was also the first decision by the bank’s new Monetary Policy Committee with its three external members. The Reserve Bank said there was a consensus to cut.
It was the first OCR change in two and a half years and, astonishingly, was the eighth cut in interest rates at the end of a 10 year-long economic expansion.
The Reserve Bank of Australia surprised some by holding its cash rate yesterday afternoon, but is also expected to cut later this year.