What the Reserve Bank said about interest rates

The Reserve Bank has reduced the Official Cash Rate (OCR) by 25 basis points to 2%.

Global growth is below trend despite being supported by unprecedented levels of monetary stimulus.  Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.  Some central banks have eased policy further since the June Monetary Policy Statement, and long-term interest rates are at record lows.  The prospects for global growth and commodity prices remain uncertain.  Political risks are also heightened.

Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.  The trade-weighted exchange rate is significantly higher than assumed in the June Statement. The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector.  This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.

Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.  However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment.  High net immigration is supporting strong growth in labour supply and limiting wage pressure.