The RBNZ just indicated it's likely to cut rates again, and now the Kiwi is tumbling

(Photo by Matt Cardy/Getty Images)

The Reserve Bank of New Zealand (RBNZ) has just signalled that it’s likely to cut interest rates again, and, as a consequence, the New Zealand dollar is tumbling.

Here’s the key phrase from the RBNZ’s intra-meeting economic assessment released on Thursday (our emphasis in bold):

Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data.

On inflation, the RBNZ noted that the rate is being held below target by “continuing negative tradables inflation”.

And the chief catalyst for the weakness in tradable inflation? The elevated level of the New Zealand dollar, says the RBNZ (our emphasis in bold):

The trade-weighted exchange rate is 6 percent higher than assumed in the June Statement, and is notably higher than in the alternative scenario presented in that Statement. The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed.

On housing, the one sticking point that many believe prevented the RBNZ from easing policy at its last meeting, the back acknowledged that “house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability.”

As communicated by the RBNZ earlier this week, it stated that it “is currently consulting on stronger macro-prudential measures aimed at mitigating risks to financial stability from the current boom in house prices”.

The RBNZ next meets to discuss monetary policy on August 11.

Here’s the hourly chart of the NZD/USD. It’s now fallen below the 70 cent level for the first time since June 28, extending its decline from July 12 to over 4.5%.

You can read the full economic assessment from the RBNZ here.

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