And the RBNZ joins the doves! In their latest policy statement, New Zealand central bank officials dropped their hawkish bias, pushing the Kiwi lower against its forex counterparts. Here’s what you should know about their announcement:
1. RBNZ open to a rate cut
As expected, RBNZ Governor Graeme Wheeler and his men decided to keep interest rates on hold at 3.50% this month. What took most forex market watchers by surprise was Wheeler’s remarks clarifying that their next interest rate move could be either up or down.
You see, prior to this announcement, analysts had been speculating when the timing of the next RBNZ rate hike might be, as the RBNZ had been holding on to its hawkish bias in its previous policy decisions. While some projected that the New Zealand central bank would keep rates on hold for much longer, not a lot of traders anticipated that the RBNZ would also be open lowering rates just like most central banks these days.
2. Inflation is likely to fall below target
As you’ve probably guessed, the main reason for the RBNZ’s dovish bias is the downturn in inflationary pressures spurred by falling oil prices. Wheeler mentioned that annual inflation is likely to fall below the central bank’s 1-3% target this year and might even post negative readings at some point.
On a slightly more upbeat note, Wheeler noted that the drop in oil prices could increase households’ purchasing power and lower the cost of doing business. He also pointed out that domestic activity remains moderate, thanks to strong local demand and an improving labor market.
3. NZD exchange rate still “unjustified and unsustainable”
Although the Kiwi has chalked up significant losses against most of its forex rivals in the past months, Wheeler didn’t pass up the opportunity to jawbone the currency once more. He reiterated that the exchange rate is “unjustified in terms of current economic conditions” and that it is “unsustainable” when it comes to longer-term fundamentals, stressing that he’d like to see “further significant depreciation.”
Many still doubt that the RBNZ would actually decide to cut rates this year, as any easing moves could stoke housing inflation further and lead to an asset price bubble. What’s pretty clear is that the central bank is no longer looking to tighten policy soon and might be sticking to a cautious stance for a while. Do you think this would lead to more Kiwi weakness or has it already been priced in?
