The Reserve Bank of New Zealand decided to leave its benchmark interest rate unchanged at 1.75 percent. Traders are saying they knew that rates would stay the same, but they were surprised by the grim tone of Reserve Bank Governor Adrian Orr’s comments. Based on his comments, traders are now saying that a rate hike is a long way off, but the chances of a rate cut cannot be eliminated
The New Zealand Dollar is trading slightly lower early Thursday after a steep sell-off the previous session. At 0545, GMT the NZD/USD is trading .6776, down 0.0019 or -0.27%. The AUD/USD is at .7352, up 0.0012 or +0.16%.
Earlier in the session, in a widely expected move, the Reserve Bank of New Zealand decided to leave its benchmark interest rate unchanged at 1.75 percent. The tone, however, of the RBNZ rate statement suggested the central bank looks to be leaning towards a more “dovish” stance in response to weaker-than-expected growth numbers.
Traders are saying they knew that rates would stay the same, but they were surprised by the grim tone of Reserve Bank Governor Adrian Orr’s comments. Based on his comments, traders are now saying that a rate hike is a long way off, but the chances of a rate cut cannot be eliminated.
Orr, in his statement, kept the door open, saying the central bank was well-positioned to manage change in either direction –up or down – as necessary. He also said the outlook for the New Zealand economy, as detailed in the bank’s May statement policy statement, remained intact.
“Employment is around its sustainable level and consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy for some time to come,” he said.
The RBNZ also said that global economic growth was expected to support demand for New Zealand’s products and services.
“Global inflationary pressure is also expected to be higher but remain modest. This outlook has been tempered slightly by trade tensions in some major economies,” he said.
“Domestically, ongoing spending and investment, by both households and government, is expected to support growth,” he said.
The central bank was also quite downbeat on growth, saying recent weaker GDP outturn implied marginally more spare capacity in the economy than the bank had anticipated.
Additionally, it said CPI inflation was likely to increase in the near-term due to higher fuel prices. Beyond that, inflation was expected to gradually rise to within the bank’s desired 2 percent annual target, resulting from capacity pressures, Orr said.
The outlook for the NZD/USD and AUD/USD remains bearish because of the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish RBNZ and RBA.
The New Zealand Dollar is especially vulnerable to a further price deterioration because the RBNZ essentially acknowledged a few more risks, globally, the deterioration of the domestic growth picture, and a little more spare capacity.
The means that the central bank is positioning itself to delay the start of the tightening cycle, or cut its benchmark rate if economic growth conditions continued to deteriorate. And this is bearish for the currency.