The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.5% due to a softening in the New Zealand economy, and major trading banks have already begun reducing floating rate mortgages which bodes well for the automotive industry.
The Reserve Bank says growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade.
The economic slowdown has seen an increase in spare capacity and unemployment, thanks to increased labour supply from strong net immigration.
A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year says the Reserve Bank.
The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful, and further depreciation would be appropriate to support sustainable growth says the Reserve Bank.
It says that house price inflation in Auckland remains high, posing a financial stability risk. Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. There are some early signs that Auckland house price inflation may be moderating.
CPI inflation is below the 1 to 3% target range, mainly due to the earlier strength in the New Zealand dollar and the 65% fall in world oil prices since mid-2014 according to the Reserve Bank.
It says the inflation rate is expected to move into the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar is reflecting in higher tradable prices.
There are some uncertainties and risks to this outlook. In the primary sector, there are risks that dairy prices remain weak for longer, and the current El Niño results in drought conditions and weaker output.
Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices.
Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range.
The Reserve Bank says it expects to achieve this at current interest rate settings, although it will reduce rates if circumstances warrant.
