The Reserve Bank of Australia surprised some by holding its cash rate yesterday afternoon, but is also expected to cut later this year.
Additionally businesses needing working capital and the capacity to upgrade or install new technology to become more productive and benefit the country's economy should not be disadvantaged by banks not reducing their lending rates on current and future loans by the full amount of the Reserve Banks' cut in rates.
On Wednesday the Reserve Bank's Monetary Policy Committee (MPC), which is led by the bank's governor Adrian Orr, cut the OCR to a record low of 1.5%, after it spent the last two years on hold at 1.75%.
NZD/USD tumbled off the back of the news, falling to a six-month low of $0.6525.
For the first time since the OCR was introduced in 1999, the decision was officially made by a committee of seven, including three people from outside the bank.
According to the record of the MPC meeting, some members of the committee shared our concern that the housing market upturn could be larger than the RBNZ is forecasting. The Australian dollar lifted as a result and NZD/JPY fell as low as 71.88 in Tokyo following the cut.
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Asked at a press conference whether the RBNZ still has an easing bias, Orr said: "We think we're in a good position to be able to observe the data as it unfolds". As it happens, the RBNZ's near-term forecasts are very much in line with our own. Rates are seen at 1.36 percent in September and December 2020, implying a more than 50 percent chance of another cut.
The Reserve Bank said the official cash rate (OCR) cut was needed to spur spending as the global economic outlook worsens and domestic growth slows. It said lower interest rates in other countries had also put upward pressure on the New Zealand dollar, which hurts exporters. Consequently, inflationary pressure is projected to rise only slowly, said the Reserve Bank in the Wednesday statement.
"Growth has come off rapidly in Europe, in China, though that's stabilized more recently, and Australia.so key trading partners".
Asked if he though the retail banks should pass on all of the rate cut to consumers he said if customers were unhappy with their rate they should shop around.
"The next move in the OCR will likely be data-dependent; we have penciled in August, but feel the risks are skewed to a later move, " he said.
"The RBNZ lowered its rate forecast to 1.4 per cent, thus leaving the door open to further easing but not strongly signalling it", Imre Speizer, head of NZ strategy at Westpac.