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New Zealand Dollar Gains Despite Record 100bp Cut by the RBNZ to 6.50%

Wednesday, 22 October 2008 20:01:30 GMT  |  Terri Belkas, Currency Strategist

The New Zealand dollar has bounced despite the fact the Reserve Bank of New Zealand slashed their Overnight Cash Rate (OCR) target by 100bps to 6.50 percent, which is the sharpest cut since the OCR was introduced in March 1999. Why?

The Reserve Bank of New Zealand slashed their Overnight Cash Rate (OCR) target by 100bps to 6.50 percent, which is the sharpest cut since the OCR was introduced in March 1999. While inflation measures remain very high, the New Zealand economy has already officially fallen into recession as GDP contracted for two consecutive quarters (-0.3 percent in Q1, -0.2 percent in Q2). Furthermore, the credit crisis taking a harsh toll on New Zealand’s financial markets, while the global economic slowdown threatens to hurt the nation’s crucial export sector. 

Looking at the RBNZ’s subsequent press release, RBNZ Governor Bollard said that he expects rates will be lowered further as growth is anticipated to miss forecasts amidst a drop in demand for exports and a contraction in consumer and business spending. However, Mr. Bollard also suggested that rates could be left steady at their next policy meeting, triggering NZD gains, as he said that further cuts depend on "evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out." Furthermore, during a post-meeting press conference, Mr. Bollard said future rate cuts "won't necessarily be of this size." As a result, the markets are betting that the RBNZ will await additional data before making monetary policy more accommodative, and will do so at a slower pace.

NZD/USD (Intraday Chart)

Source: Bloomberg

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