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New Zealand Dollar Soars Despite RBNZ Interest Rate Cut

New Zealand Dollar Soars Despite RBNZ Interest Rate Cut

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • RBNZ cuts cash rate by 25bps to 2 percent as widely expected
  • Markets interpret RBNZ statement as less dovish than forecast
  • Buoyant house prices, inflation outlook may limit further easing

The New Zealand Dollar raced higher following the RBNZ monetary policy announcement despite a 25 basis point rate cut bringing the baseline lending rate to 2 percent. As discussed previously, the cut was overwhelmingly priced in by investors ahead of the announcement. This meant that surprise risk was skewed to the upside for the currency in the event that forward guidance proved less dovish than what was projected.

The RBNZ said the annual inflation rate is expected to begin recovering in the fourth quarter of this year. Firm data confirming or negating this presumption will not be available until early 2017, hinting the central bank will wait at least until then to reassess the need for another cut. Furthermore, officials said the buoyant housing market continues to pose financial stability risks and promised to consult on stronger macro-prudential measures to address it.

Further easing in the meantime threatens to amplify upward pressure on house prices, implying the RBNZ will stay its hand until an effective regime containing housing risks is in place. Besides the time needed to move through consultation and on to policy implementation, Governor Graeme Wheeler and company will probably want a further wait-and-see period to see if the new scheme works before topping up stimulus.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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