New Zealand’s central bank unexpectedly cut interest rates to a record-low 2.25 percent on Thursday, triggering a slide in the local dollar and sparking talk of a global currency war as countries seek to revitalize their economies in a world of slow growth.
New Zealand’s move to trim the Official Cash Rate by 25 basis points follows the Bank of Japan’s historic decision in January to adopt negative interest rates and comes ahead of the European Central Bank’s policy review later in the day when it is expected to cut rates deeper into minus territory.
The Reserve Bank of New Zealand cited low domestic inflation and a deteriorating global economic outlook as factors in Thursday’s rate cut, on the same day as Moody’s ratings agency warned of a credit risk to the country’s banks from tumbling dairy prices.
RBNZ Governor Graeme Wheeler said policy makers were concerned about slowing growth in China, and highlighted risks around Beijing’s unexpected devaluation of the yuan in August – a move that sparked fears of a global currency war.
“If China had a very significant and prolonged devaluation it would in essence spread deflation around the world,” Wheeler told reporters at a press conference.
Given China’s dominant role in the international trading system “by and large every other currency would be appreciating against the Chinese currency,” he said.
The specter of currency devaluations took center stage at a meeting of G20 policy makers in Shanghai this month, especially after China’s August move stoked uncertainty over its currency policy and after Japan’s surprise shift to negative rates.
The G20 finance ministers however played down talk of beggar-thy-neighbor policies and agreed to inform each other in advance about policy decisions that could lead to currency devaluation.
While Thursday’s RBNZ rate cut wasn’t aimed at bringing down New Zealand’s exchange rate, Wheeler said that “pretty well most central banks would like to see their exchange rates lower.” A decline in the New Zealand dollar would “be appropriate given the weakness in export prices,” he said.