New Zealand cuts benchmark interest rate to 2.75 per cent following plunge in dairy prices

WELLINGTON, New Zealand – New Zealand’s central bank on Thursday reduced its benchmark interest rate by a quarter percentage point to 2.75 per cent and indicated more cuts were likely.

The economy has been slowing due to a plunge in prices for the country’s key dairy exports. That’s due to a worldwide supply glut and a drop in demand from China.

The New Zealand dollar dropped by more than 1.5 per cent after the announcement and was trading at about $0.628.

The 0.25 per cent rate cut was the third quarter-point reduction in recent months, and had been expected by most economists. Reserve Bank Governor Graeme Wheeler said further reductions were likely, depending on upcoming economic data. The rate is reviewed about every six weeks.

The central bank is trying to balance weakening growth with runaway house prices in the biggest city, Auckland.

While the rate reduction is likely to give a boost to farmers by lowering the country’s currency, it also runs the risk of adding fuel to the housing market by making mortgages cheaper to finance.

Wheeler said the economy was growing at an annual rate of about 2 per cent, down from about 4 per cent last year. He said business and consumer confidence had weakened, while construction in Christchurch, which is rebuilding from a devastating 2011 earthquake, had reached a plateau.

He pointed to some bright spots in the economy: robust tourism and immigration, and plenty of planned construction in Auckland.