The Reserve Bank has cut the cost of borrowing to a record low 1.75 percent.
Reserve Bank Governor Graeme Wheeler Photo: RNZ / Rebekah Parsons-King
Reserve Bank Governor Graeme Wheeler lowered the Official Cash Rate by quarter of a percentage point at the latest review this morning.
But the bank dropped reference to the need or likelihood of further rate cuts.
The governor said interest rates were now at levels to ensure the economy was strong enough to push inflation back to the middle of its 1-3 percent target band.
But he warned "numerous uncertainties remain" particularly relating to the the international outlook, and "policy may need to adjust accordingly."
The surprise victory of Donald Trump to become the next American president can be added to the list of uncertainties, at least until more is known about the United States' economic direction.
In his statement, he said domestic growth was being supported by strong population growth, construction activity, tourism, and accommodative monetary policy.
"Recent dairy auctions have been positive, but uncertainty remains around future outcomes.
"High net immigration is supporting growth in labour supply and limiting wage pressure.
"House price inflation remains excessive and is posing concerns for financial stability.
"Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.
Inflation
Headline inflation continued to be held below the target range by ongoing negative tradables inflation, the statement said.
"Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation.
Global inflation was still weak even though commodity prices had come off their lows. "Political uncertainty remains heightened and market volatility is elevated."
Weak global conditions and low interest rates relative to New Zealand were keeping the pressure on the New Zealand dollar exchange rate, which was higher than was sustainable for balanced economic growth.
"A decline in the exchange rate is needed," the governor's statement said.
'Still more downside risks'
The RBNZ's decision was seen as balanced but with a slight dovish tinge.
"There are still more downside risks than upside risks in the near term at least," said Kiwibank's chief economist, Zoe Wallis.
She said the uncertainties in the global environment have been stoked by Mr Trump's election victory and it was understandable the RBNZ would leave the door ajar, even if only slightly, to a further rate cut.
The RBNZ is now seen on the sidelines for the next year or two.
Economists were also sceptical that retail banks would pass on much, if any, of the latest rate cut to consumers, with lower lower retail lending rates.
"Banks need more deposits and if that means deposit rates can't fall, borrowing rates can't either," said ANZ Bank chief economist Cameron Bagrie.
The Bank of New Zealand was quick to cool expectations of borrowers.
The BNZ's acting director of retail and marketing, David Bullock, said its rates were not directly linked to the cash rate, and it needed to attract local savers so it did not have to borrow more expensively overseas.
"To encourage and attract more deposits - people's savings and terms deposits - we need to pay a sharper return to savers."
Local medium term wholesale interest rates edged higher after the RBNZ statement.
The New Zealand dollar initially jumped about half a cent to 73.5 US cents after the decision, but since then has surrendered most of its gains to sit just below 73 cents.
