(Adds analyst reaction, bond detail)
By Praveen Menon and Charlotte Greenfield
WELLINGTON, Aug 7 (Reuters) – New Zealand’s central bank stunned markets on Wednesday by cutting the official cash rate (OCR) by a bigger-than-expected 50 basis points, and looked set to keep policy lower for longer in the face of growing economic risks.
The Reserve Bank of New Zealand’s (RBNZ) move to a record trough of 1% sent the kiwi dollar tumbling to depths last seen in early 2016 and drove bond yields to all-time lows.
Markets wagered even further cuts would be needed as central banks worldwide try desperately to head off a deeper slowdown.
“This was a stunning decision,” said Westpac’s NZ chief economist Dominick Stephens, noting the rates have been cut by 50 basis points on only three other occasions.
“The RBNZ appears to be trying to get ahead of the curve with todayâ€™s move,” he said. “Given the Committeeâ€™s clear willingness to reduce rates, and our view that there is some further economic softness to come in the near term, we now expect another 25bp cut in November.”
The aggressive move comes just days after the Trump administration labelled China a currency manipulator in a dramatic escalation of the Sino-U.S. trade war.
“The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives,” RBNZ said in a statement.
“GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.”
The central bank lowered its cash rate by 25 basis points (bps) in May as international trade frictions clouded the growth outlook. Economists polled by Reuters had predicted policymakers would cut rates again this week by a quarter of a percentage point.
The New Zealand dollar tumbled 1.7% to $0.6416 and yields on 10-year bonds dived 18 basis points to 1.15%. Two-year yields sank to just 0.81% as investors priced in at least one more rate cut.
The RBNZ itself forecast around a 1-in-3 chance of an easing by year end and saw no chance of a hike until late 2021, a lower for longer outlook also recently adopted by the Reserve Bank of Australia (RBA).
New Zealand’s move follows rate cuts by global policymakers who have been forced to inject more stimulus as fears grow over the broadening fallout of the U.S.-China trade dispute on the global economy.
Events this week rang more alarm bells as the trade war took a turn for the worse after the U.S government labelled China a currency manipulator for the first time since 1994.
The morphing of the Sino-U.S. trade conflict into a currency war leaves open economies like New Zealand heavily exposed and vulnerable to global pressure.
Last week, the U.S. Federal Reserve cut rates for the first time in a decade, and the RBA eased in both June and July.
Surprisingly-strong New Zealand employment figures this week tempered some of the pessimism, though leading indicators suggest growth will remain under pressure as businesses face tough times.
New Zealand’s business outlook hit a 11-month low in July and consumer confidence sank. And while GDP growth picked up slightly in the first quarter, a largely weak set of global factory activity, trade and company earnings reports point to a softening outlook. (Reporting by Praveen Menon and Charlotte Greenfield; Writing by Wayne Cole, Editing by Shri Navaratnam)