RBNZ cuts rates to 2% and signals more to come

Photo by Dave Rowland/Getty Images

The Reserve Bank of New Zealand (RBNZ) cut interest rates by 25 basis points at the conclusion of its August monetary policy meeting, taking the cash rate to a record-low level of 2%.

The decision was expected by markets and economists alike.

Suggesting that the rate cut won’t be the last, the board stated that its “current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range”.

A clear easing bias, indicating that 2.0% is unlikely to be the low in the overnight cash rate.

On inflation, one of the main factors behind the decision to cut rates, it acknowledged that while “long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations”.

It also stated that “headline inflation is being held below the target band by continuing negative tradables inflation”.

And the factor holding down tradable inflation, that impacted largely by global markets? The high New Zealand dollar.

“The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector,” said the bank

“This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed.”

Outside of inflation and the New Zealand dollar, the board also stated that “house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability”.

However, allowing the board to cut rates despite those risks, it noted that it is “consulting on stronger macro-prudential measures that should help to mitigate financial system risks arising from the rapid escalation in house prices”.

The full August monetary policy statement can be accessed here.

Despite all the talk about the exchange rate being too high, inflation too low, reduced risks in the housing market, the signal that more easing is coming and the actual rate cut itself, the New Zealand dollar rallied following the rate cut, jumping to as high as .7341 following the decision.

You won’t read that in the economic textbooks.

The NZD/USD currently trades at .7279

NZD/USD 5-Minute Chart

With the rate cut today entirely priced in, it was the RBNZ’s revised forecasts that caused the spike in the Kiwi with the bank signalling that it expects to cut rates only one more time in the period ahead.

Here’s the bank’s key forecast variables from its August monetary policy statement. With the overnight cash rate already sitting at 2%, the forecast low in the 90-day bank bill forecast rate implies that there’ll only be one further 25 basis point cut delivered, likely to arrive in the second quarter of 2017.

That, along with upgrades to the New Zealand dollar TWI forecasts, has disappointed investors who were expecting a more aggressive easing stance from the bank, sending the Kiwi soaring higher as a consequence.

Source: RBNZ

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