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    RBNZ likely to cut again but no longer sees kiwi as overvalued

    The Reserve Bank of New Zealand (RBNZ) cut its official cash rate on Thursday by 0.25% to 3.00%, as was widely expected by analysts. This is the second cut in two months by the RBNZ and follows June’s quarter point cut.

    New Zealand’s central bank was one of the first in advanced economies to start raising rates after the financial crisis when it began lifting interest rates in early 2014. However, the outlook for the New Zealand economy worsened dramatically at the start of 2015 as falling dairy and oil prices have led to a sharp slowdown in first quarter growth due to struggling exports. Inflation has also been impacted, running near 0%, below the RBNZ’s target range of 1-3%.

    The kiwi has been on a downward path since July 2011 on weakening commodity prices and on expectations that the RBNZ would soon be forced to cut rates. It touched a new 6-year low of 0.6496 against the US dollar on July 16 and markets were expecting that the New Zealand dollar would fall further after today’s cut. But the kiwi instead jumped higher against the greenback, hitting a high of 0.6693 in European trading, after some analysts had bet that the RBNZ would make a sharper reduction of 50 basis points in its cash rate.

    Investors were also responding to the details of the statement released by the RBNZ, which carried a less dovish tone than the June statement. The central bank’s Governor, Graeme Wheeler, noted that the New Zealand dollar had “declined significantly” and that “further depreciation is necessary” but refrained from calling the currency overvalued like he did it in the June statement.  The kiwi’s accelerated decline in the past three months may have influenced the change in tone.

    The outlook for future rate cuts hasn’t changed though and Wheeler pointed that “further easing seems likely”. With demand in China still on the weak side and no sign of a pick-up in commodity prices in the near term, the RBNZ has plenty of room to cut rates further in the coming months, but will possibly do so at a slower pace than expected.

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