New Zealand Dollar Rallies Despite RBNZ Interest Rate Cut
- New Zealand Dollar climbs versus the greenback after the RBNZ rate decision
- The central bank cut rates to 2.5 percent from 2.75 as expected by economists
- RBNZ expects to reach its inflation target of 1 to 3 percent at current rate level
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The New Zealand Dollar rallied against its US counterpart after the Reserve Bank of New Zealand cut rates and signaled the end of near-term easing. Heading into the monetary policy announcement, overnight index swaps were pricing in a 63 percent probability of a rate cut. Today’s announcement brought the interest rate level down to its lowest level in about 2 years, and fully reversed the hiking cycle which the central bank engaged in the first half of 2014.
Diving into the monetary policy announcement, the RBNZ maintained the status quo that monetary policy needs to be accommodative. What separates this interest rate decision from October’s is that the Reserve Bank of New Zealand believes inflation will reach the central bank’s 1 to 3 percent target at current interest rate levels. In fact, the RBNZ forecasted that the inflation target will be reached in early 2016. The Reserve Bank of New Zealand also noted that the recent rise in the NZD is unhelpful. The central bank stated that further depreciation would be appropriate in order to support sustainable growth.
After the interest rate decision, RBNZ’s Governor Graeme Wheeler followed-up with a speech at a news conference. Mr. Wheeler said that inflation expectations are “where we want them”. He added that the New Zealand Dollar exchange rate should be lower, saying the currency looks higher than is needed. Even though the central bank said easing has reached an appropriate level for its inflation target, Wheeler added that they will cut rates further if warranted. He identified developments in China and global growth trends as the biggest risks around the outlook.
Even though there was an interest rate cut, the NZDUSD rallied. The markets were expecting easing and the central bank did not disappoint. What seemed more crucial was the forward guidance set by the Reserve Bank of New Zealand. With the RBNZ signaling that the easing cycle could be over, the monetary policy announcement appeared to be interpreted as a “hawkish cut”. Indeed, overnight index swaps are now pricing in a 32 percent probability of a 25bps cut over the next 12 months, down from 66 percent yesterday, which seems to account for the Kiwi’s upswing.
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