In a complete turnaround, New Zealand central bank Governor Graeme Wheeler introduced a quarter-point reduction in the official cash rate to a record-low 2.25 percent Thursday. The cut came just five weeks after a speech in which he signaled that there was no urgency to additional easing in response to weak inflation.
The move, which financial markets had assigned just a 30 percent probability, sent the New Zealand dollar down just over 1 U.S. cent in early trading. Wheeler also said additional easing may be required, and most economists now predict a second reduction in June.
The central bank's assistant governor John McDermott said that Thursday's decision was really about trying to stabilize inflation expectations. The RBNZ is directed to keep annual inflation in a 1 percent to 3 percent target range. With annual inflation currently hovering around 0.1 percent and inflation expectations at a 22-year low, the central bank chose to cut the rate.
More Easing Expected
According to Wheeler, "Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."
Long-term inflation expectations are well anchored at 2 percent but there is always the possibility that interest rates could fall below this rate.
One strategist noted that "the market will clearly start pricing in at least one more 25 bps cut and possibly two.”
The central bank now expects the inflation figure to return within the target band by late 2016, rather than in the current quarter and forecasts a 90-day bank bill rate of 2.2 percent by December.
The RBNZ cut rates four times between June and December last year, reversing four rate hikes in 2014.