Talking Points:
- RBNZ cuts its Official Cash Rate 25 basis points from 3.25% to 3.00%
- Despite the rate cut, the New Zealand Dollar climbs 1.3% versus the US Dollar
- RBNZ rhetoric dovish but perhaps not as aggressive as anticipated
The New Zealand Dollar climbed more than 1.3 percent (over 85 pips) versus the US Dollar. The gain came after the Reserve Bank of New Zealand cut its benchmark lending rate by 25 basis points for a second consecutive meeting. This is the first time the central bank cuts its cash rate in subsequent meetings since 2009 and continues to reverse a period of rate hikes the central bank engaged in through 2014.
The RBNZ said New Zealand’s economy is currently growing at an annual rate of roughly 2.5 percent. Compared to June’s Official Cash Rate Statement, this update is a softer growth outlook. The policy authority went on to say inflation is still below the central bank’s 1% to 3% target and it sees CPI returning to 2 percent in early 2016. As for the currency itself, its sees further depreciation as necessary given the weakness in export commodity prices. So far, the bank judges Kiwi’s depreciation has provided support to the export and import competing sectors.
Overall, the bank judged that a reduction in the cash lending rate was warranted by a softening economic outlook and low inflation. It also noted that some further easing is likely. This is where the unexpected reaction from the currently likely comes from. The Kiwi’s climb reflects that this outcome was largely expected – overnight swaps (a market proxy) were pricing in a 100% chance of a 25 bps rate cut. The bank did follow through with expectations, but not necessarily with the commitment to further easing that was anticipated. Looking at government bond yields: 2, 5, and 7 year yields climbed in the aftermath of the rate decision. Only 10 year government bond yields declined.
