The dovish turn sweeping the global economy gathered pace Wednesday as New Zealand shocked markets with a half-percentage point interest-rate cut, sending its currency tumbling.

Reserve Bank Governor Adrian Orr and his policy committee slashed the official cash rate to a record low 1% as slowing economic growth prevents inflation from returning to the central bank’s goal. Orr signaled further easing could be possible and even hinted at non-conventional policy as the global outlook darkens amid a worsening economic conflict between the U.S. and China.

“It’s easily within the realms of possibility that we might have to use negative interest rates” or other non-standard measures, Orr told a press briefing in Wellington. Still, cutting rates by 50 basis points today “probably reduces the probability” of having to use such tools, he said.

New Zealand and Australia, who came through the global financial crisis without having to resort to unconventional policy, now find themselves bracing for an economic slowdown with borrowing costs at record lows and little ammunition to deliver further stimulus. Australia last month cut its benchmark to 1% and economists see further reductions in both economies as domestic demand slackens and trade tensions between the U.S. and China threaten to curb exports and commodity prices.

Most economists expected the RBNZ to deliver a quarter-point cut in the OCR. The New Zealand dollar fell more than a U.S. cent on the surprise, buying 64.03 cents at 5:29 p.m. in Wellington, from 65.5 cents immediately before the statement. Ten-year bond yields fell 14 basis points to a record-low 1.158%. The Australian currency fell to its lowest since 2009 on bets the Reserve Bank of Australia will follow its New Zealand counterpart.

New Zealand’s central bank was the first among developed economies when it cut in May and now becomes the first to deliver a half-percentage point reduction this easing cycle. The last time the RBNZ cut rates on such a scale was in March 2011, following a series of devastating earthquakes in the South Island city of Christchurch.

“We are very surprised,” said Dominick Stephens, New Zealand chief economist at Westpac Banking Corp. in Auckland. “The RBNZ appears to be trying to get ahead of the curve.”

A report Tuesday showed a lift in hiring and wages, while the government has pledged to increase spending. Still, the RBNZ lowered its economic growth forecasts and projected it will take longer for inflation to reach the midpoint of its 1-3% target range.

“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,” it said. “Global economic activity continues to weaken, easing demand for New Zealand’s goods and services.”

‘Future Action’
Asked if today’s cut means no more to come, Orr said: “No, today’s decision doesn’t rule out any future action.”

He said the bank’s forward path, which shows the average OCR falling to a low of 0.91% late next year, was “good guidance” as to “how we see the interest rate path unfolding.”

The projection implies the chance of another quarter-point cut. Economists at lenders including Bank of New Zealand and ASB Bank now expect a cut to 0.75% in November. That raises the risk of non-standard policy eventually being deployed.

The RBNZ is “well advanced” on developing a suite of tools for unconventional policy such as negative interest rates, asset purchases, forward guidance and other forms of intervention, Orr said, adding it would be “negligent” not to be doing the work.

Credit : https://www.bloomberg.com/news/articles/2019-08-07/rbnz-cuts-interest-rates-more-than-expected-to-revive-inflation?srnd=premium-asia