NZD/USD licks its wounds above 0.5815 after a post-RBNZ selloff
- The New Zealand Dollar dropped beyond 1% after a dovish cut by the RBNZ.
- The bank cut rates by 25 bps, with two policymakers voting for a 50 bps cut.
- The US Dollar remains firm with all eyes on the Fed.
The New Zealand Dollar is the worst performer of the G8 currencies so far on Wednesday. The pair has lost more than 1% against the US Dollar, following a “dovish cut” by the Reserve Bank of New Zealand earlier today, which sent the pair to four-month lows at 0.5815.
New Zealand’s central bank trimmed its Official Cash Rate (OCR) by 25 basis points to 3%, as widely expected, but the bank statement revealed that two policymakers voted for a half-point rate cut, which sent the Kiwi tumbling across the board.
The RBNZ hints at further rate cuts
The bank observed that economic growth had stalled over the previous months, with rising prices hampering consumer spending and the labour market softening in a context of global uncertainty.
Governor Hawkesby remained confident that the fiscal outlook and the declining government spending would contribute to keeping inflationary pressures in check, which points to further monetary easing down the road.
The US Dollar, on the other hand, remains firm, favoured by a sour market sentiment with all eyes on the Fed. The release of the minutes of the last FOMC meeting is expected to shed some light on the division among policymakers, although the highlight of the week will be Fed Chairman Powell’s conference on Friday.
Investors will be eager to know whether recent macroeconomic figures, and especially the Nonfarm Payrolls shock in the first week of the month, have moved the Fed chief to consider rate cuts, even with the risk of tariffs looming. Powell´s comments are expected to set the US Dollar’s near-term direction.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.