RBNZ raises rates; signals for a pause in its tightening cycle

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate to 3.5% from 3.25% as expected. We were also expecting the bank to fire a warning shot at the kiwi and signal that it plans to pause its tightening cycle. The bank did exactly this, although Governor Wheeler’s language used to describe the NZ dollar was even more aggressive than we forecast. The RBNZ is likely cheering the impact this had on the kiwi, with NZDUSD plummeting immediately after today’s announcement.

Wheeler’s jawboning hits the kiwi hard

Wheeler stated that “the level of New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” This statement is so aggressive it could be interpreted as a precursor to possible intervention. The RBNZ is clearly concerned about the stubbornness of the kiwi in the face of falling commodity prices. A high exchange rate limits the competitiveness of its export sector and falling dairy and wood prices reduce primary sector incomes, which is very powerful one-two punch to the NZ economy.

RBNZ on hold until at least December

The key policy line from today’s statement by Wheeler was the bank’s admission that “it is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level.” In other words, the bank is doing exactly what we thought they would; they are switching to data-watching mode in the near-term. This reinforces our view that the RBNZ will remain on hold until at least December, at which point the bank may elect to raise interest rates again, although it’s looking like a close call at this stage.

Inflation not a concern for the RBNZ

On inflation, the bank noted that it’s important that inflation expectations remained constrained, hence the decision to raise the OCR today. Overall, inflation remains moderate and subdued wage growth and a high exchange rate, coupled with the bank’s recent tightening, should keep a lid on inflation in the near-term.

NZDUSD

NZDUSD plummeted to a support zone around 0.8600 in the aftermath of today’s policy meeting. The combination of aggressive currency and dovish policy talk from the central proved too much for the commodity currency. From here, it make fall further towards a support zone around 0.8570 – 61.8% retracement level from its almost 3-yr high.

Source: FOREX.com