New Zealand shocks markets with aggressive rate cuts

This article is more than 12 months old

Aug 08, 2019 06:00 am

WELLINGTON: New Zealand's central bank stunned markets yesterday by cutting interest rates a steep 50 basis points and even flagged the risk of going nuclear by taking rates below zero.

The radical shift drove its currency to 31/2-year lows.

By afternoon, the Australian dollar was worth 66.9 US cents (93 Singapore cents), as markets ramped up their bets that Australia would also cut rates faster and deeper than previously expected, a level not seen since early 2009.

Seemingly trying to get ahead of policy easings in the US and Australia, the Reserve Bank of New Zealand (RBNZ) slashed its official cash rate to a record trough of 1 per cent and opened the door to truly drastic action.

"It is easily within the realms of possibility that we might have to use negative interest rates," RBNZ governor Adrian Orr told a news conference after its policy meeting.

Markets, which had predicted a 25-basis point cut after a similar sized reduction in May, had not even dreamed that such a move would be needed barring a global recession or a natural disaster, and the impact was immediate.