MNI REVIEW: RBNZ Cuts Rate To Record Low, Outlook Balanced

--Bank Wargames Zero Rates, QE In Case Crisis Scenario Emerges

By Lachlan Colquhoun

     WELLINGTON (MNI) - The Reserve Bank of New Zealand cut its benchmark

Official Cash Rate to a record low 1.50%Wednesday, but removed its easing bias,

noting a "more balanced outlook" for interest rates going forward.

     Citing "larger than anticipated" falls in growth among major trading

partners Australia and China and slower than expected domestic growth and

inflation, the RBNZ's new seven member committee was unanimous in its decision

to cut rates by 0.25%, the first move since late November 2016.

     Governor Adrian Orr said the bank had done modelling to assess the impact

of zero interest rates and quantitative easing measures -- if needed.

     "The work is related to how negative can interest rates go before people

just want to hold cash, how can we do direct asset buy backs when needed," he

told a press conference following the rate decision.

     "Our team is working hard on creating a market for mortgage obligations, so

that we have a pool of assets to be able to do this type of work,." he said. "So

there are various means by which monetary policy can play an expansionary role

even with zero interest rates."

     Orr stressed that this was "crisis" planning, so the Bank understood "what

kind of cheques we can write, if and when they are needed."

     While not expecting a crisis, the RBNZ is particularly wary of global

economic volatility and the small NZ economy's exposure to key trading partners

Australia and China, estimating that GDP growth across New Zealand's trading

partners has fallen from 3.7% in 2018 to 3.3% this year.

     --DOMESTIC SLOWDOWN

     The RBNZ saw a lower OCR as necessary to support the outlook for employment

and inflation consistent with its policy remit, the RBNZ said in the Monetary

Policy Statement which accompanied today's decision, noting employment sitting

close to a maximum sustainable level, although the outlook for jobs growth is

more subdued. Consequently, inflationary pressure is projected to rise only

slowly."

     Orr said that like many economies, New Zealand was struggling with a unique

combination of low unemployment and labour market tightness, but sluggish growth

and inflation as a result of depressed levels of business investment, wages

growth and consumer spending.

     All this was delivering faltering GDP growth of 2.3% year-on-year.

Inflation is at 1.5%, towards the lower end of the 1 to 3% target range.

     This stuttering in the economy needed additional stimulus "to help keep

employment near its maximum sustainable level and to raise underlying inflation

to the 2 percent target mid-point," the RBNZ said.

     The RBNZ also hoped the cut could revive the housing market and this could

flow through to consumer spending.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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