fundamental alert

RBNZ Cuts Its Benchmark 150bps In Line With Expectations

Wednesday, 03 December 2008 19:06:48 GMT  |  John Kicklighter, Currency Strategist

The Reserve Bank of New Zealand lowered its benchmark lending rate 150 basis points to a six-year low 5.00 percent. What is more surprising , and a true testament to current economic coditions, is that this was exactly in line with economists forecasts. What's more, market participants are pricing in further, aggressive easing from the policy authority to meet growth and inflation expectations. This seems reasonable considering the statement from Central Bank Governor Bollard that accompanied the decision.

In the statement, Bollard said "ongoing financial market turmoil" and "deterioration in the outlook for global growth" have lowered forecasts since October. In fact, in the forecasts that accompanied the release, the policy authority projected a 0.3 percent contraction in the economy and 0.2 percent drop in employment through June of 2009 (year end). Alternatively, it also projected inflation to pull back within the 1 to 3 percent tolerance band by the first half of next year (annualized CPI now stands at 5.1 percent). However, this is not likely to curb policy through the short-term. According to Bollard's comments, he expects the drop in interest rates, fiscal policy and the depreciation in the New Zealand dollar to revive growth more gradually. To expedite the recovery, the policy maker echoed a call from many of his global counterparts in asking lenders to pass on the relief from the cummulative 325 basis points of easing up to today.

Looking at price action from the kiwi dollar after the rate decision was announced and statement released, there was little in the event that surprised traders. Considering Bollard would also ease up on language that would project certainty in another rate cut at the next meeting (which is interpretted as more aggressive cuts rather than just looser policy alone), there was little precedence for speculators to revalue the kiwi to the economic outlook. What's more, with global interest rates falling quickly, and the New Zealand currency already very depressed, we can see the influence of interest rates fading.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars