XM - Analytics

XM

536.75 6.75/10
70% of positive reviews
Real

RBNZ takes markets by surprise with 0.25% cut, sending kiwi down

 

The Reserve Bank of New Zealand made an unexpected cut in its official overnight cash rate on Wednesday, lowering it by 0.25% to 3.25%. The majority of economists had expected that there would be no cuts this month. Another reason for the surprise was that the RBNZ had previously expressed reservations on reducing the lending rate as it could fuel an already overheated housing market in Auckland, the country’s biggest city.

However, in May, the central bank announced new measures to tighten lending requirements for residential properties, such as increasing the minimum deposit requirement to 30%. The measures paved the way for this month’s rate cut as they removed the threat of creating a housing bubble.

With economic growth picking up to above 3% since the first of quarter of 2014, the case for a rate cut may not seem so conspicuous. But annual inflation has been below the RBNZ’s target of between 1-3% for the last two quarters and price pressures are expected to remain low due to falling import prices and muted wage growth. Falling commodity prices and weak dairy prices were also factors in convincing the RBNZ to make its first rate reduction in four years as they’ve had a major impact on slowing down demand and income levels.

Despite hovering at 5-year lows against the US dollar in recent weeks, the New Zealand dollar is still considered to be overvalued by the RBNZ, which sees the country’s large current account deficit as a reason for further adjustment in the exchange rate.

The kiwi dropped by 2.7% against the US dollar shortly after the rate cut announcement. Having been trading at around 0.7210 before the announcement, it hit 0.7015 after the move and edged lower during European trade as it briefly fell below the 0.70 level. It was a similar story against the Australian dollar, with the aussie jumping to 1.1020 after the cut and later peaking at 1.1078.

Further falls in the kiwi are expected as the RBNZ left the door open for further rate cuts if new data in the coming months indicates that inflation is not likely to converge towards the Bank’s central target range in the medium term.

The Reserve Bank of New Zealand made an unexpected cut in its official overnight cash rate on Wednesday, lowering it by 0.25% to 3.25%. The majority of economists had expected that there would be no cuts this month. Another reason for the surprise was that the RBNZ had previously expressed reservations on reducing the lending rate as it could fuel an already overheated housing market in Auckland, the country’s biggest city.

However, in May, the central bank announced new measures to tighten lending requirements for residential properties, such as increasing the minimum deposit requirement to 30%. The measures paved the way for this month’s rate cut as they removed the threat of creating a housing bubble.

With economic growth picking up to above 3% since the first of quarter of 2014, the case for a rate cut may not seem so conspicuous. But annual inflation has been below the RBNZ’s target of between 1-3% for the last two quarters and price pressures are expected to remain low due to falling import prices and muted wage growth. Falling commodity prices and weak dairy prices were also factors in convincing the RBNZ to make its first rate reduction in four years as they’ve had a major impact on slowing down demand and income levels.

Despite hovering at 5-year lows against the US dollar in recent weeks, the New Zealand dollar is still considered to be overvalued by the RBNZ, which sees the country’s large current account deficit as a reason for further adjustment in the exchange rate.

The kiwi dropped by 2.7% against the US dollar shortly after the rate cut announcement. Having been trading at around 0.7210 before the announcement, it hit 0.7015 after the move and edged lower during European trade as it briefly fell below the 0.70 level. It was a similar story against the Australian dollar, with the aussie jumping to 1.1020 after the cut and later peaking at 1.1078.

Further falls in the kiwi are expected as the RBNZ left the door open for further rate cuts if new data in the coming months indicates that inflation is not likely to converge towards the Bank’s central target range in the medium term.

 


To leave a comment you must be or register