The Reserve Bank of New Zealand on Wednesday lowered its official cash rate to a fresh record low citing weak inflation and uncertain global economic outlook.
The Monetary Policy Committee, chaired by RBNZ Governor Adrian Orr, unanimously decided to reduce the OCR by 25 basis points to 1.5 percent from 1.75 percent.
Economists had expected the benchmark rate to remain at 1.75 percent, where it has been since November 2016.
Given the recent weaker domestic spending, and projected ongoing growth and employment headwinds, there was a need for further monetary stimulus to meet its objectives, the MPC said.
Although employment is near its maximum sustainable level, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is expected to rise only slowly.
"Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates," according to the accompanying statement.
The MPC noted that domestic growth slowed from the second half of 2018. Reduced population growth through lower net immigration, and continuing house price softness in some areas, has restricted the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources curbed investment.
A key downside risk relating to the growth outlook was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand's largest trading partners.
The near-term outlook for domestic GDP growth is soft, the MPC said. The committee cautioned that soft growth would reduce capacity pressure, and dampen employment growth and inflation. Further, economic growth is expected to remain low over the first half of 2019.
Overall risks to the inflation projection were balanced, MPC said. The central bank raised its near-term outlook for inflation, expecting an increase of 1.6 percent in 2019 from previous forecast of 1.4 percent.
However, the Committee noted that annual inflation is now estimated to return to 2 percent in mid-2021, slightly later than the February projection of reaching in late 2020.
The Committee also observed the relatively subdued private sector wage growth, despite businesses suggesting that the inability to find labor is a significant constraint on their growth. The Committee noted the limited pass-through of the nominal wage growth to consumer price inflation.
"The lower path reflected the economic projections and the balance of risks discussed, and is consistent with both inflation and employment remaining near the Committee's objectives," it said.
The RBNZ's projections signaled the possibility for another rate cut by March 2020. The latest forecasts show OCR falling to 1.4 percent in March 2020, compared to prior forecast of 1.8 percent.
As it becomes apparent that the economy is in worse shape than the RBNZ thinks, it is expected to cut interest rates again, Ben Udyan, an economist at Capital Economics, said.
An acceleration in GDP growth in the first quarter may stave off another rate cut for the next few months, but as the labor market slackens and growth remains subdued in the second half of this year, it is likely to cut rate to 1.25 percent in November, he added.