RBNZ Instant Reaction: Priming the Pumps

Many of the expectations heading in to the Reserve Bank of New Zealand’s Monetary Policy Statement and Interest Rate Decision was that they would step away from their hawkish stance and lean a little more toward the doves. The genesis of that line of thought is largely due to the European Central Bank and their institution of Quantitative Easing which is having ripple effects throughout the monetary policy making world. Merely one hour earlier though, the Federal Reserve appeared stoic in their decision to remain on the same monetary path as last month, adding that they are watching international developments without going in to detail. The RBNZ on the other hand, made a significant enough change to impact their currency negatively.

The main change that they made was to include the line: “In the current circumstances, we expect to keep the OCR on hold for some time.” This differs from the previous statement in that the RBNZ was much more stubborn and took what was believed at the time to be an unnecessarily hawkish stance by saying: “Some further increase in the OCR is expected to be required at a later stage.” They also conceded that inflation could fall in to negative territory “for a period before moving back towards 2 percent, albeit more gradually than previously anticipated.”

Despite the widespread belief that the RBNZ would be backing away from their hawkish platitudes, as evidenced by the NZD/USD dropping nearly 500 pips since January 15th, most didn’t anticipate an acknowledgement of potential deflation. If the RBNZ is publicly stating their expectation of such dismal inflation, then the next logical conclusion would be that they are also considering cutting interest rates to get ahead of that potential issue; a priming of the pumps, if you will. In response, the NZD is falling against all other currencies as investors begin to prepare for potential future action from the RBNZ.