- The Reserve Bank of New Zealand is expected to cut interest rates by 50bps to 4.75% on Wednesday.
- The deepening economic downturn in New Zealand's economy and optimism about inflation point to the possibility of a major rate cut from the RBNZ.
- The RBNZ's policy announcement is likely to cause severe volatility for the New Zealand dollar.
The Reserve Bank of New Zealand (RBNZ) is expected to follow in the footsteps of the US Federal Reserve (Fed) and announce its interest rate decision at 1am Japan time on Wednesday.
New Zealand's central bank does not release quarterly economic forecasts along with policy statements. A subsequent press conference for Gov. Adrian Orr is not scheduled.
What do you expect from the RBNZ's interest rate decision?
The RBNZ is widely expected to cut the official cash rate (OCR) by 50 basis points (bps) from 5.25% to 4.75% after its October monetary policy meeting. The central bank cut interest rates by a surprising 25 basis points in August.
There has been no new macro news since then, apart from New Zealand's June quarter gross domestic product (GDP) report. According to data released by Statistics New Zealand on September 19, GDP fell by 0.2% in the second quarter, down from a revised 0.1% growth in the previous quarter. Economists had expected a decline of 0.4% in the reporting period, while the RBNZ had forecast a decline of 0.5%.
Although the GDP contraction in the second quarter was weaker than expected, a downward trend in inflation and a slowdown in economic activity solidified the view that the RBNZ could cut the index by 50 basis points this week. However, New Zealand's persistent non-tradable inflation and a strong recovery in business confidence may lead the RBNZ to opt for a modest rate cut in November.
“The latest RBNZ forecast calls for headline CPI to be 2.3% and non-tradable CPI to be 5.1% in the third quarter,'' ING currency strategists said.
“While we see a non-negligible risk of inflation falling below 2%, the midpoint of the target range, non-tradable CPI should remain strong. This 50bp rate cut is therefore a one-off measure. It added that the RBNZ would likely default back to a gradual 25bp cut, with the final rate closer to 3%.
What impact will the RBNZ's interest rate decisions have on the New Zealand dollar?
The New Zealand dollar (NZD) is hovering around 0.6100, a one-month low against the US dollar (USD), with markets fully pricing in Wednesday's 50bps RBNZ rate cut. Meanwhile, the strong September nonfarm payrolls (NFP) data has the market ruling out the possibility of a significant Fed rate cut in November, and the US dollar is appreciating across the board.
The NZD/USD pair appears to be at risk in both directions ahead of the RBNZ policy announcement. That fate will depend on central bank communications about the scale and pace of future rate cuts.
If the central bank cuts OCR by 50bps as expected, but surprises with a cautious tone in its policy statement and pushes back on expectations for deeper rate cuts, NZD is likely to find new demand. In such a case, NZD/USD could show a strong rebound towards the 0.6300 level. A surprise 25bps rate cut by the RBNZ could also revive NZ dollar buyers.
On the other hand, if the RBNZ acknowledges the development of disinflation while expressing concerns about economic pain, leaving the door open for further significant rate cuts, NZD/USD could trend downward towards 0.6000 again. There is a possibility.
FXStreet Senior Analyst Dhwani Mehta provides a brief technical outlook on trading the New Zealand dollar in relation to the RBNZ policy announcement. The Relative Strength Index (RSI) remains deep in bearish territory today. ”
“If buyers can protect the all-important 200-day SMA, a recovery could begin towards the 21-day SMA at 0.6226, which could be preceded by a 50-day SMA at 0.6157. “A continuation below the SMA could accelerate a new downtrend towards the 0.6000 level, below which the August 16 low of 0.5978 will be tested,” Dhwani added. .
Central Bank Frequently Asked Questions
Central banks have the important mission of ensuring price stability in a country or region. Whenever the price of a particular good or service changes, an economy faces inflation or deflation. A continuous increase in the price of the same product indicates inflation, and a continuous decrease in the price of the same product indicates deflation. The central bank's job is to keep demand constant by adjusting policy interest rates. The mandate for the largest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BOE), is to keep inflation close to 2%.
Central banks have one important tool at their disposal to raise or lower inflation. It is to adjust the base policy rate, commonly known as the interest rate. Upon prior communication, the central bank will issue a statement regarding the policy rate and provide additional reasons as to why it may maintain or change (lower or increase) the policy rate. Local banks will adjust their savings and lending rates accordingly, making it harder or easier for people to earn money on their savings and for businesses to take out loans and invest in their businesses. I will do it. Monetary tightening is when a central bank significantly raises interest rates. Lowering the base interest rate is called monetary easing.
Central banks are often politically independent. Members of the central bank policy committee go through a series of panels and hearings before being appointed to the policy committee seat. Each member of the board often has certain beliefs about how the central bank should control inflation and subsequent monetary policy. Doves are members who are happy with inflation slightly above 2% but want a very accommodative monetary policy with low interest rates and low lending to significantly boost the economy. Members who would rather raise interest rates to reward savings and keep a constant eye on inflation are called “hawks'' and will not rest until inflation is at or slightly below 2%.
There is usually a chairperson or president who leads each meeting, and consensus must be built between hawks and doves, with votes split to avoid a 50-50 tie on the pros and cons of the current topic. have the final say in the matter. Policies need to be adjusted. The chair often gives a speech that can be viewed live, conveying the current financial stance and outlook. Central banks seek to promote monetary policy without causing wild fluctuations in interest rates, stocks, and currencies. All members of the central bank are expected to signal their stance on markets ahead of the policy meeting event. Starting several days before the policy meeting, members are prohibited from speaking publicly until new policies are communicated. This is called the blackout period.
