SMM News: in early Asian trading on Wednesday, the New Zealand Fed cut interest rates by 25 basis points to 1.5%, in line with market expectations.
Interest rates of 1.5 per cent are the lowest in New Zealand's history.
It was the first rate cut by the New Zealand Fed in two and a half years, last in November 2016. The move makes the New Zealand Fed the first developed country to cut interest rates.
Not only that, the New Zealand Fed hinted in its joint forecast that there was still the possibility of another rate cut:
The official cash rate is expected to be 1.59 per cent in September 2019 (previously expected to be 1.75 per cent).
The official cash rate is expected to be 1.38 per cent in June 2020 (1.81 per cent previously expected).
The official cash rate is expected to be 1.36 per cent in September 2020 (previously expected to be 1.88 per cent).
The official cash rate is expected to be 1.93% in June 2022.
Kiwibank, the Postal Bank of New Zealand, followed suit after the central bank cut interest rates, announcing a 15 basis point cut in its mortgage rates.
Why cut interest rates?
In the minutes, the New Zealand Fed explained why it had decided to cut interest rates:
The slowdown in the global economy has led to a decline in demand for goods and services in New Zealand. Members agreed that there was a need to further expand stimulus in view of domestic consumption, expected economic growth and employment pressures. It is appropriate to cut interest rates during the forecast period, and a cut in the benchmark interest rate will help create a more balanced interest rate outlook. With regard to inflation, which was widely believed to be one of the sources of pressure to cut interest rates, the New Zealand Fed said that members agreed that the overall risks to inflation were basically balanced and that inflation was expected to reach 2 per cent in the second quarter of 2021. It had been expected to be the fourth quarter of 2020. At the same time, the Fed cut its CPI forecast for the year to June 2020 to 1.7 per cent from 2.0 per cent.
Rapid market response
After the announcement of the interest rate cut, the relevant financial assets reacted quickly. The yield on the 10-year New Zealand Treasury note fell 10 basis points to 1.78 per cent.
The New Zealand dollar fell 1.1% against the dollar to hit 0.6525, its lowest level since November 2018. The Federal Reserve of New Zealand also forecast the exchange rate of its currency, saying it expected the New Zealand dollar / US dollar to be about 0.7280 in June 2020, compared with an expected 0.7190.
Is there a tide of interest rate cuts?
From a global perspective, the New Zealand Fed is not the first country to cut interest rates. In fact, this year, many central banks have announced interest rate cuts, the Bank of India "run" the fastest.
On February 7th the central bank suddenly cut interest rates by 25 basis points, cutting them to 6.25%, the first cut in 2019.
On April 4th the central bank again announced that it would cut the repo rate by 25 basis points to 6 per cent.
On May 7, the Bank of Malaysia announced that it would cut its overnight policy rate by 25 basis points to 3%. It is the first time the country has cut benchmark interest rates since July 2016 and the second Asian country to cut interest rates this year after India.
Analysts believe this is not the only thing that has been done to cut interest rates. Affected by complex changes in international trade, central banks in many emerging countries in Asia have the potential to cut interest rates. The central bank of the Philippines is likely to announce a rate cut later this week, and Thailand is likely to announce an interest rate change in Wednesday's interest rate resolution.
Markets even expect the Fed to join in cutting interest rates. After all, the high-profile Fed expressed its willingness to suspend interest rate hikes as early as January 31, making it clear that "to some extent, there is less possibility of raising interest rates in the future".
However, Fed Chairman Powell said after last week's interest rate meeting that weak inflation at this stage is due to the "temporary" (transitory) factor. As soon as this came out, market expectations for the Fed to cut interest rates in the second half of the year were largely dispelled. Now, the market believes that the Fed's attitude on the issue of interest rate adjustment is not obvious, neither to cut interest rates nor to raise interest rates.
Does this mean that global central banks will shift from the previous "interest rate hike" to the cycle of "interest rate cut"?
At least, analysts at Mizuho and UBS don't think so. They said that in terms of the Bank of Malaysia's rate cut, this could be a one-off, rather than the beginning of a radical easing cycle.
Ed Moya, senior market analyst at Oanda, a London-based securities firm that accurately predicted the New Zealand Fed's rate cut, said the Fed's main consideration for the rate cut was a precipitous decline in inflation and economic activity in recent months.