The New Zealand dollar was one of the strongest performing currencies on Wednesday after employment grew more-than-expected and the RBNZ governor said monetary policy won’t focus on headline inflation. The kiwi jumped by 1% to a 3½-week high against the US dollar as traders pushed back their expectations of a rate cut in March.
The Reserve Bank of New Zealand last cut its official cash rate in December by 25bps to 2.50% but kept them on hold at its January meeting. In the last meeting statement, the RBNZ acknowledged that it is likely to take longer for inflation to rise towards the Bank’s 1-3% target band and signalled that further easing may be required over the coming year.
Headline CPI slowed to a 16-year low of 0.1% year-on-year in the final quarter of 2015. However, speaking today at the Canterbury Employers’ Chamber of Commerce in Christchurch, RBNZ Governor Graeme Wheeler warned against “inappropriate fixation” on headline inflation. Wheeler said the Bank needs to be flexible on monetary policy given that low oil prices are recognized as a legitimate factor that can push inflation outside the target band in the Bank’s Policy Target Agreement. He added that “It would be inappropriate to attempt to offset the low oil price effect through the official cash rate”.
With core inflation currently running at 1.6% and inflation expectations averaging at 2%, the RBNZ is unlikely to be in a rush to cut rates in the near future even if headline CPI declines further in the coming quarters. However, with most of the risks to the New Zealand economy being to the downside, the Bank is keeping an eye on global economic developments.
For now though, the New Zealand economy appears to be weathering the global headwinds, with the unemployment rate falling to the lowest level since the first quarter of 2009. The jobless rate unexpectedly dropped to 5.3% in the final quarter of 2015, down from the third quarter’s 6.0% rate and defying expectations of a rise to 6.1%. The number of people in employment increased by 0.9% over the quarter and wages were up by 0.4%.
The New Zealand dollar jumped to 0.6541 against the US dollar after the jobs data and extended its gains into the European session, breaking above the 0.66 level. It also powered ahead against its Australian counterpart with the aussie briefly dropping to a low of 1.0672 versus the kiwi before rebounding back above 1.07.
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