NZ dollar rallies after OCR cut announced

The New Zealand dollar rallied over half a US cent after announcement the official cash rate would drop to 2.50 per cent. Photo / Getty

The New Zealand dollar rallied sharply after the Reserve Bank cut its official cash rate to 2.50 per cent, based on the market's view that the central bank had reached a floor after being on an easing streak since June.

In forecasts accompanying its rate review, the Reserve Bank said its forecast 90-day bill rate track - which the market takes as a guide for the future direction of the official cash rate - was 2.6 per cent by the third quarter of 2016, staying at that level through 2018.

The New Zealand dollar rallied in response, gaining by just over half a US cent to US67.30 on the news.

"Basically, the Reserve bank cut its rate but essentially what they have signalled is that that is it for them," ANZ senior foreign exchange strategist Sam Tuck said.

Westpac, in its initial reaction to the move, said the Reserve Bank had given mixed messages about any further easing. "We interpret this as slightly hawkish for the market, and the market has reacted so," it said.

The Reserve Bank, in its statement, said he New Zealand economy had softened over 2015, due mainly to lower terms of trade.

Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment, it said.

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The New Zealand dollar had risen since August, partly reversing the depreciation that occurred from April. Reserve Bank Governor Graeme Wheeler said the rise in the exchange rate was "unhelpful", adding that "further depreciation would be appropriate".

House price inflation in Auckland remained high, posing a financial stability risk, but there were early signs that Auckland house price inflation may be moderating, it said.

CPI inflation is below the bank's 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 percent fall in world oil prices since mid-2014.

The Reserve Bank said the inflation rate was expected to move inside the target range from early 2016.

"Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range," it said.