Why Did the RBNZ Decide to Cut the Official Cash Rate?

Wheeler cuts official cash rate to 2%

For RBNZ (Reserve Bank of New Zealand) Governor Graeme Wheeler, coming out with a cut was a no-brainer to markets. Markets expected a rate cut due to domestic inflation, the strengthening New Zealand dollar, and the recent rate cut by the other major banks as a result of global uncertainty surrounding the Brexit vote. The other major banks that cut rates recently included the Bank of England and the Reserve Bank of Australia. So, markets wondered how big of a cut Wheeler would deliver. Wheeler announced a rate cut of 25 basis points. The OCR (official cash rate) was revised to 2.0% on August 10 after the monetary policy review.

Why Did the RBNZ Decide to Cut the Official Cash Rate?

RBNZ’s view on ongoing domestic conditions

In his monetary policy assessment, Wheeler expressed the committee’s concern about the heavy upward pressure on the New Zealand dollar. This is adding pressure on the export sector. Wheeler noted that the inflation objective will be hard to attain without a decline in exchange rates. Wheeler also pointed out that low dairy prices are resulting in reduced investments in the diary sector. Another major concern for the RBNZ would be the excessive housing price inflation that’s preventing Wheeler and the RBNZ from going for a more aggressive rate cut.

Impact on the market

The iShares MSCI Pacific Ex-Japan ETF (EPP) fell by 0.14% on August 10, 2016. The iShares MSCI Australia ETF (EWA) is another major ETF in the Oceania segment. It rose by 0.05%. Tracking the upward movement in the New Zealand dollar, the iShares MSCI New Zealand Capped ETF (ENZL) rose by 0.33% after the monetary policy.

Among the major developed Asian ADRs (American depositary receipts), Canon (CAJ) rose by 0.56%, while Kyocera (KYO) rose by 0.48% on August 10, 2016. Nomura Holdings (NMR) fell by 2.5%.

In the next part of this series, we’ll look at how global markets and currencies reacted to the RBNZ’s rate cut decision.