WELLINGTON: New Zealand's central bank paralyzes markets on Wednesday by cutting the official cash rate (OCR) by a larger than expected 50 basis pointing to a record low 1.00%, and looked to keep the policy lower in the face of increasing financial risks.
The surprise move by the Reserve Bank of New Zealand (RBNZ) sent the kiwi dollar to a more than 3-1
The Kiwidollar lost a significant 2% to $ 0.6378, a level not seen since early 2016 and the largest one-day percentage decline since late March, and comes after the Trump administration labeled China as a currency manipulator in a dramatic escalation of the Sino-American trade war.
"The Monetary Policy Committee agreed that a lower OCR is needed to continue to meet employment and inflation targets," the RBNZ's Monetary Policy Committee said in a statement accompanying the interest rate decision.
"GDP growth has slowed over the past year and headwinds are increasing. In the absence of further monetary stimulus, employment and inflation are likely to ease in relation to our targets," the statement states.
The central bank lowered its cash rate by 25 basis points (bps) in May as international trade frictions flooded growth prospects, and economists polled by Reuters had predicted that policy makers would cut interest rates again this week by a quarter percentage point.
The New Zealand dollar fell 1% to $ 0.6443, a 10-month low, and bond yields fell following interest rates as markets priced for further easing, possibly as early as next month.
RBNZ's forecasts published with the statement show that a new cut is possible by the end of the year, which will take OCR below 1%.
The closely correlated Australian dollar fell to its lowest since 2009 on Wednesday, with expectations that the Reserve of Australia will follow RBNZ's example.
New Zealand's move follows interest rate cuts by global policy makers who have been forced to inject more stimulus as fears grow over the widening decline of the US-China trade conflict for the global economy.
And the events this week rang several alarm bells for politicians as the trade war took a dramatic turn for the worse on Monday after the US government labeled China a currency manipulator for the first time since 1994.