The RBNZ’s move, which surprised no one, came in response to an adjusting domestic economy and softening global economic growth.
New Zealand is currently dealing with a sharp decline in export prices, the plateauing of the Christchurch rebuild and weakening business and consumer confidence.
Reserve Bank Governor Graeme Wheeler said this economic outlook, along with the need to keep CPI inflation near the 2% target, warranted the reduction in the OCR
He also indicated that further easing in the OCR is likely to come – although this will depend on the emerging flow of economic data.
Market response to the RBNZ announcement was rapid.
The New Zealand dollar fell by about US1c, swap rates were sent 3 basis points lower, and Kiwibank immediately cut its floating rate to 5.90%.
Westpac chief economist Dominick Stephens said the RBNZ’s move was bang in line with expectations, but left economists in "data watch mode" to try and determine whether there will be a further OCR cut in October.
He noted the RBNZ did talk about downside risks to its central forecast – and issued an alternative scenario in which global growth slows sharply which could see the OCR falling to 2.0%.
While the RBNZ expects the falling exchange rate to produce ongoing tradables inflation, Stephens’ view is that it will produce only a temporary burst of inflation.
“This difference of view, combined with our slightly more downbeat view on economic growth, leaves us very comfortable forecasting a 2.0% low-point in the OCR.
“If anything, we feel that the RBNZ has given a slight encouragement to our view - the RBNZ's alternative scenario opened the door a crack to a sub-2.5% OCR.”
Stephens added that, in the MPS media conference, Wheeler said there is plenty of scope to cut the OCR "substantially" if global growth weakened further or if El Nino weather conditions produced a drought in New Zealand.
Meanwhile, BNZ chief economist Tony Alexander said that by the end of October the RBNZ will probably have unwound all of last year's rates tightening.
This means it will have reversed rate rises for the second time post-GFC – in common with other central banks.
“The post-GFC world is producing far lower inflation than traditional economic models have suggested.
“Those models unfortunately no longer work and you need to be very careful about paying too much attention to forecasts of interest rates - and perhaps most other economic variables.”