Kiwi clobbered as New Zealand's central bank puts rate cuts back on the table

The Reserve Bank of New Zealand (RBNZ) left interest rates steady at their April monetary policy decision, keeping their overnight cash rate unchanged at 3.50%.

The move was widely expected by the markets.

Here’s the full policy statement released by RBNZ Governor Graeme Wheeler this morning:

“The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.

Trading partner growth continues at around its long-term average, but remains dependent on highly accommodative monetary settings. Policy interest rates are at record lows and many European government bonds are trading at negative yields. Looking ahead, considerable uncertainties exist in Europe, China and Australia, and on the timing of US monetary policy adjustment, although global growth should be boosted by the decline in world oil prices. Crude oil prices are almost 50 percent below their July 2014 level, with increasing supply mostly contributing to this fall.

The New Zealand economy continues to grow at an annual rate of around 3 percent, supported by low interest rates, high net immigration and construction activity, and the fall in fuel prices. House price inflation is elevated in Auckland. However, lower dairy incomes, lingering effects of drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth.

Lower fuel prices, coming on top of the high exchange rate and low global inflation, lowered annual CPI inflation to 0.1 percent in the March quarter. Underlying inflation remains low and is expected to pick up gradually. Monetary policy will focus on the medium-term trend in inflation. The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates.

We are watching closely the ongoing impact on tradables inflation from global forces and the high New Zealand dollar. On a trade-weighted basis, the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals. The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome.

The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors. It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.

The Bank will continue to monitor and carefully assess the emerging flow of economic data”.

Overall the statement strikes a more dovish tone than that seen when they last met in March. As highlighted above, they have ramped up their rhetoric towards the level of the New Zealand dollar, adding the additional the line that its appreciation “is unwelcome”.

While they stopped short of adopting a full easing bias – it’s also clear that rates are – on present indication – more likely to fall than rise in the second half of the year.

In the April statement the board make it clear that they are not “currently considering any increase in interest rates” with all of the discussion in the second-to-last paragraph centred on the potential for lowering interest rates.

This differs vastly from what was seen in March where the board noted that their “central projection is consistent with a period of stability in the OCR” with “future interest rate adjustments, either up or down, (dependent) on the emerging flow of economic data”.

With interest rates now seen as more likely to fall than rise the New Zealand dollar has been clobbered this morning – something that is shown in the chart below.

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