NZD Soars On RBNZ Rate Cut – What Next?

At their August meeting, the Reserve Bank of New Zealand lowered rates by 25bps, a move which was widely expected, to leave the headline rate now standing at a record low of 2%.There had been rumblings of a potential 50bps cut with traders anticipating that the bank would look to act more aggressively in light of the current low inflation environment and rising NZD. Given the level of expectation, the consensus move saw NZD bid sharply higher in response although initial gains weakened as details of the bank’s Dovish statement hit the wires.

Bank Signals Further Easing

Further easing is to be expected with the bank explicitly noting that their “current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.” In terms of assessing the growth of the economy the bank noted that “global growth is below trend despite being supported by unprecedented levels of monetary stimulus” also adding that “the prospects for global growth and commodity prices remain uncertain” and “political risks are also heightened”; the latter comment referring no doubt to the upcoming US election and also Brexit negotiations in Europe.

Domestic Economy

Considering the domestic economy, the RBNZ observed that growth “remains supported by strong inward migration, construction activity, tourism, and accommodative monetary policy” however “low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment.” Referring to the housing sector, which poses significant challenges for RBNZ easing, the bank noted that “house price inflation remains excessive and has become broad-based across regions, adding to concerns about financial stability.”

NZD Strength

Among the key features of the statement was the reference to NZD strength. The RBNZ commented that “weak global conditions and low-interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.” One of the consequences of this strength was that it drives some deflation in terms of tradable inflation and “makes it difficult for the bank to meet its inflation objective”. Following on from comments noting the likelihood of further easing the bank noted that “a decline in the exchange rate is needed”.