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New Zealand just left rates on hold but cuts may be coming and the Kiwi is getting smoked

Getty Images: Wellington Rugby 7s

As expected, the Reserve Bank of New Zealand kept official interest rates unchanged at 2.50% at its January monetary policy meeting.

While the rate decision was all but expected, the wording of the accompanying monetary policy statement delivered a few surprises, particularly in the final paragraph in which the RBNZ provides its forward guidance on rates.

Only six weeks after watering down the chances of further rate cuts, the bank has now put the prospect of further monetary policy easing back on the table.

“Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected,” read the January statement.

“Monetary policy will continue to be accommodative. Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.”

This was a sharp turnaround from the sentiment expressed in December – a meeting in which the RBNZ cut interest rates to a record-low level of 2.50% – in which the bank noted that they “expect to achieve this at current interest rate settings”.

Beyond the forward guidance, the bank noted that financial conditions had eased in recent weeks, although admitted that a further fall in the New Zealand dollar “is appropriate”.

“In recent weeks there has been some easing in financial conditions, as the New Zealand dollar exchange rate and market interest rates have declined,” said the bank.

“A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.”

Following the release of the December quarter CPI report last week – something that revealed headline inflation rose by just 0.1% over 2015 – the RBNZ noted that headline inflation “remains low”.

However, countering that statement, they also acknowledged that the annual core inflation rate, that which strips out volatile price movements, “is consistent with the target range at 1.6%” with inflation expectations “stable”.

The RBNZ inflation target band is between 1-3%.

Perhaps unsurprisingly given the volatility in financial markets to start 2016, the bank also suggested that “uncertainty about the strength of the global economy has increased due to weaker growth in the developing world and concerns about China and other emerging markets”.

As a result of this, the RBNZ acknowledged that “there are many risks around the outlook”, particularly when it comes “to the prospects for global growth (citing China specifically), global financial market conditions, dairy prices, net immigration, and pressures in the housing market”.

The statement, far more dovish that the previous policy statement released on December 10 last year, has seen rate cut expectations build and put a lead weight underneath the New Zealand dollar.

The kiwi currently sits at .6435 against the US dollar, down 0.95% for the session.

NZD/USD 5-minute chart

You can read the full RBNZ January statement here.

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