New Zealand cuts rates amid Trump uncertainty

NZ’s central bank has become the first to respond to heightened global volatility in the wake of Donald Trump’s win.

“Political uncertainty remains heightened and market volatility is elevated,” said Graeme Wheeler. Pic: Getty Images

The Reserve Bank of New Zealand has lowered interest rates, becoming the first central bank to respond to heightened global market volatility in the wake of Donald Trump’s unexpected US election win.

The Reserve Bank of New Zealand’s benchmark interest rate now sits at a record low of 1.75 per cent, down from 2.0 per cent. The move was expected by all 10 economists surveyed by The Wall Street Journal.

RBNZ Governor Graeme Wheeler made it clear he is worried about market instability and US political upheavals, saying they could trigger further rate cuts.

“Political uncertainty remains heightened and market volatility is elevated,” Mr Wheeler said.

“Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

The rate cut was well telegraphed to markets, with the RBNZ frustrated that consumer prices have refused to respond to repeated interest-rate cuts this year. Still, some economists said that the US political shift would cement the case for lower rates.

Donald Trump became the US president-elect yesterday, surprising pollsters who had widely predicted Hillary Clinton would instead be heading to the White House.

Mr Trump’s win kicked off a wave of market instability as investors wait to see how he will govern. New Zealand’s economy, which is commodity-based and highly reliant on trade, is in the firing line if global trade agreements are ripped up by the Trump administration.

Inflation remains well below the RBNZ 1 per cent to 3 per cent target range at a revised 0.4 per cent in the third quarter. But economic growth has accelerated, dairy prices are climbing, and unemployment has fallen to its lowest level in almost eight years.

The New Zealand dollar was higher following the interest-rate cut, as the RBNZ indicated the rate cut should be sufficient to bring growth and inflation back to target. Some economists had thought the RBNZ would close the door to further cuts. But, citing political instability, it has kept the door open.

Dow Jones Newswires