The RBNZ just sent the New Zealand dollar hurtling higher

Dave Rowland/Getty ImagesAuckland on NYE
  • The RBNZ left New Zealand’s cash rate steady at 1.75% in February, as expected.
  • It still believes the next move in official interest rates could be “up or down”, although its new forecasts suggest it thinks the next move is likely to be higher.
  • While it admitted that international risks has “heightened over recent months”, it still sounded confident about the domestic economic outlook.
  • The tone of the RBNZ statement was not as dovish as markets were expecting, sending the New Zealand dollar hurtling higher.

The Reserve Bank of New Zealand (RBNZ) is still sounding confident in early 2019, bucking the dovish shift seen at other major central banks this year, including at the RBA.

“The Official Cash Rate (OCR) remains at 1.75%,” said RBNZ Governor Adrian Orr in the bank’s February monetary policy statement.

“We expect to keep the OCR at this level through 2019 and 2020. The direction of our next OCR move could be up or down.”

Domestically, Orr said that while employment is near its “maximum sustainable level”, core consumer price inflation (CPI) remained below its 2% target mid-point, “necessitating continued supportive monetary policy”.

However, he sounded optimistic on the outlook for the New Zealand economy, noting “low interest rates and government spending [are expected to] support a pick-up in New Zealand’s GDP growth over 2019.”

And that’s expected to help return core CPI to target, albeit gradually.

“As capacity pressures build, CPI is expected to rise to around the mid-point of our target range at 2%,” Orr said.

The RBNZ also released updated economic forecasts at this meeting that can be found below.

RBNZ

The bank downgraded its views on GDP growth and inflation for this year, but upped the expected level where the New Zealand dollar trade-weighted index will sit.

Internationally, Orr, like the RBA, acknowledged that the risk of a sharper economic downturn in New Zealand’s key trading partners had “heightened over recent months”.

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from,” he said.

As for the risks to the bank’s inflation outlook, Orr said they were both to the “upside and downside”, maintaining the view communicated late last year.

“A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent,” he said.

Given that backdrop, Orr repeated that the RBNZ would keep its cash rate at an “expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation”.

However, while the RBNZ pushed back when it expects the cash rate to rise, seeing an increase as probable by the March quarter of 2021 rather than Q3 2020 previously, that view has come as a surprise to markets which were nearly fully priced for a rate cut by the end of this year.

The mismatch in views has seen the New Zealand dollar soar as a consequence, seeing it lift to as high as .6827 against the greenback.

The NZD/USD currently trades at .6799, up 1% from Tuesday’s close.

Investing.comNZD/USD 5-Minute Chart.

“The RBNZ maintained a neutral bias noting that the next move in the OCR could be up or down,” said Richard Grace, Chief Currency Strategist at the Commonwealth Bank.

“Although this comment has been made before by RBNZ Governor Adrian Orr, the market was expecting more emphasis on the downside risks. This may have generated an extra short squeeze on NZD.”

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