As expected, Reserve Bank governor Don Brash has cut the official cash rate from 6.25% to 6%, although he warned the market there are strong grounds for being cautious about further cuts.
Still, the decision was made yesterday before the US Federal Reserve’s surprise move overnight to cut its benchmark rate, the federal funds rate, from 5% to 4.5%. It is the fourth time this year the Fed has cut rates in an attempt to bolster the flagging US economy.
Brash says the main reason for lowering interest rates is slowing growth in New Zealand’s main trading partners.
`This slowdown in global growth will have an adverse impact on demand for our exports, and is likely to reduce inflationary pressures in New Zealand,’ he says.
But world prices for New Zealand’s commodities remain robust and the New Zealand dollar has declined since March. `These unexpected developments, if they persist, could take much of the disinflationary sting out of weakening global demand,’ Brash says.
As well, significant parts of the economy are operating near to capacity and the labour market is relatively tight. ``It is for these reasons that we are only cautiously moving the OCR in the same direction as official interest rates in other countries. We will be assessing the emerging data carefully.’’
The central bank will next review interest rates on 16 May when it releases its next monetary policy statement.
Financial markets took little notice of Brash’s words of caution. The 90-day bank bills, the benchmark from which floating mortgage rates are set, had already fallen in reaction to the Fed’s move and half an hour after his statement were trading at 5.82%, down from 5.91% yesterday.
Economists are still expecting a further cut on 16 May.
