New Zealand’s central bank yesterday slashed its interest rates to record lows in a surprise move, citing the nation’s struggling dairy industry and a deteriorating global outlook.
The move — the fifth reduction since June last year — cuts the bank’s benchmark rate to 2.25 percent from the 2.5 percent set in December last year.
Analysts had expected the Reserve Bank of New Zealand to adopt a wait-and-see approach, but it instead adopted a hawkish tone, warning there could be more cuts to come.
“Further policy easing may be required... we will continue to watch closely the emerging flow of economic data,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement.
Westpac Banking Corp economist Imre Speizer said that there would be one more cut in June, then rates would settle at 2.0 percent for a time, while ANZ Bank said rates could go as low as 1.75 percent by September next year.
New Zealand, the world’s top dairy exporter, has been hit by a slump in global milk prices as rivals, particularly in the EU, ramp up production.
The central bank said the outlook for global growth had also deteriorated, amid weakness in China and Europe, as well as increased volatility on financial markets.
Wheeler was also troubled by pessimistic expectations about inflation, which was just 0.1 percent last year, well below the bank’s target of 1.0 to 3.0 percent.
“This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes,” he said.
Meanwhile, South Korea’s central bank yesterday kept its key interest rates unchanged at record lows, refusing to cut further as it looks to nurture growth in the anemic economy, while also preventing a flight of capital from the nation.
While the decision to keep borrowing costs at 1.5 percent for a ninth straight month was expected, the Bank of Korea has faced growing calls for another reduction with exports tumbling as economic woes in key market China show no sign of abating.
South Korea’s exports have fallen for 14 consecutive months since the start of last year, plunging 12.2 percent year-on-year last month alone.
“The trend of improvement in the [South] Korean economy is weakening, due mainly to the continuing sluggishness of exports,” the central bank said in a statement.
However, there are concerns that a further rate cut would spark a fresh exodus of foreign funds, putting additional pressure on bonds, shares and the won.
It would also embolden already highly indebted households and companies to take more loans, putting them further in debt and worsening one of South Korea’s most acute domestic economic headaches. Collective household debt stood at a record high of 1.2 trillion won (US$995 billion) at the end of December last year.
“Household debts have reached a high level indeed and it’s a constant source of our concern to curb them,” Bank of Korea Governor Lee Ju-yeol told reporters.
Lee said he is skeptical that the benefits of any further interest rate cut would outweigh the potential disadvantages.
“I don’t think the current rates are restraining the real economy,” he said.
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