Although only half of market participants predicted the Reserve Bank of New Zealand would cut interest rates today, it has indeed done so!
The Reserve Bank of New Zealand has lowered the Official Cash Rate (OCR) from 1.75% to a record low of 1.5%, its first cut since late 2016.
New Zealand has thus become one of the first Western countries to cut interest rates, and has entered an era of zero interest rates, as inflation is currently 1.5%.
The Reserve Bank has also signalled further cuts. That could mean negative interest rates, making spending more worthwhile than saving for ordinary people. This actually benefits the wealthy more, because they routinely borrow from banks to invest, while ordinary people save for the future.
The rate cut also suggests that New Zealand's economic outlook is weak and needs “stimulus”.
{Ad}
The Reserve Bank of New Zealand's newly established Monetary Policy Committee includes three external members. In its statement, the committee said: “The Monetary Policy Committee decided that a lower OCR is necessary to support the outlook for employment and inflation.
Among Western political parties, the right emphasises growth and favours tax cuts, while the left emphasises fairness and favours higher taxes and greater welfare provision. The Reserve Bank's rate cut will benefit investment, but also signals underlying economic risks. Hopefully, the government will introduce complementary policies to promote economic growth and abandon ideas such as imposing a capital gains tax.
A rate cut means lower borrowing costs. Commercial banks are very likely to follow suit, which is unquestionably good news for the property market and homebuyers. In the current market, the cut is unlikely to trigger another sharp rise in house prices, but mortgage repayments will fall. This will ease pressure on homebuyers and could boost market activity.
Finally, after the rate cut was announced at 2h this afternoon, the New Zealand dollar fell half a US cent to 1 New Zealand dollar buying 65.55 US cents. For those planning to visit, study or immigrate to New Zealand, now is a good time to exchange money!