Dollar falls as Reserve Bank says rates cut likely

The New Zealand dollar has fallen by about half a US cent after the Reserve Bank signalled that more official interest rate cuts are likely. File photo

The New Zealand dollar has fallen by about half a US cent after the Reserve Bank signalled that more official interest rate cuts are likely.

The bank, in an economic update, said prospects for growth in the global economy had diminished despite very stimulatory monetary policy and low oil prices and that "significant downside risks remain".

"Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy," it said. "However, low dairy prices are depressing incomes in the dairy sector and weighing on farm spending and investment," the bank said.

Monetary policy would continue to be accommodative, it said.

"At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range," the bank said. The official cash rate sits at 2.25 per cent and today's announcement adds more weight to the likelihood of a rate cut next month. The New Zealand dollar fell by about half a US cent to US69.90c in the minute following the announcement from US70.30c just before its release.

Today's statement from the Reserve Bank said the trade-weighted exchange rate was 6 percent higher than was assumed in its June Statement.

The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation making it difficult for the bank to meet its inflation objective.

The bank repeated its message that a decline in the exchange rate was needed.

Market expectations were for the Reserve Bank to deliver a "dovish" assessment of monetary policy outlook in today's statement, confirming an August cut and opening the door to additional easing beyond that.

ASB economists said the statement reinforced its view that the Reserve Bank would cut the official rate to 2.0 per cent in August, then cut again to 1.75 per cent in November.

"More importantly, the Reserve Bank made very strong comments about the strength of the exchange rate and how it makes it difficult for the bank to meet its inflation objective," ASB economists said.

The Reserve Bank had previously been reluctant to cut interest rates further due to financial stability risks. "This week's proposed tightening of loan to value restrictions helps them on this front," ASB said.

Westpac economists said the Reserve Bank's statement made it clear that the strong New Zealand dollar was undermining the outlook for inflation, and that another rate cut on August 11 was likely.

"We have maintained the view that the OCR would be cut to 2 per cent in August, and today's statement seals the case," Westpac said. "It also seems likely that the August monetary policy statement will leave the door open to further interest rate cuts if the currency remains elevated," the bank said.