New Zealand cuts key interest rate to record low 2 per cent

WELLINGTON, New Zealand – New Zealand’s central bank on Thursday cut its benchmark interest rate to a record low 2 per cent, but its efforts to boost inflation and lower the currency failed to impress traders, who bid the New Zealand dollar higher.

The Reserve Bank cut the rate by a quarter-point in a move that was widely anticipated by economists, although some had thought the bank might go further with a half-point cut. In its projections, the bank predicted only modest future rate cuts when some had expected deeper cuts.

The so-called kiwi dollar jumped by more than 1 per cent after the announcement before easing a little to trade at $0.73.

The currency moved in the opposite direction to that desired by Reserve Bank Governor Graeme Wheeler, who said the currency needed to decline as the high exchange rate was putting pressure on exporters.

Wheeler told reporters it was always difficult to predict how currency markets would react and that the bank hadn’t given serious thought to a half-point cut.

“We didn’t think it was justified,” he said.

New Zealand has kept its interest rates higher than many developed nations as it seeks to avoid adding more fuel to a runaway housing market.

Wheeler on Thursday made some of his toughest comments yet on housing, calling the rise in prices “excessive” and a risk to financial stability. The bank has introduced certain loan requirements to try and curb speculation and is considering further action.

Wheeler said that under different conditions, the bank might be raising rates to put a brake on housing. But he said the “phenomenal circumstances” around the globe which had seen nations set interest rates at or near zero prevented that from happening.

He said in many ways the New Zealand economy is quite healthy compared with other developed nations, with GDP expected to grow by about 3.5 per cent over the next two years.

Unemployment is currently 5.7 per cent and inflation 0.4 per cent, below the central bank’s target of between 1 per cent and 3 per cent.

Opposition political parties say the rosy figures mask an economy that’s being propped up by high immigration and an unsustainable housing boom.