- Reserve Bank of New Zealand expected to cut rates, shocks market by holding
- Keeps interest rate at 1%
- Sparks massive short-covering rally
The Reserve Bank of New Zealand was expected to cut interest rates during the trading session on Wednesday but failed to do so, keeping the interest rate at 1%. This caused chaos initially, as the New Zealand dollar had been heavily shorted in anticipation of the rate cut.
As the market got shocked, there was a sudden spike in the value of the Kiwi dollar. This caused quite a bit of volatility in the currency markets for a short amount of time. However, as traders started to focus on other things around the world, there was more of a safety bid yet again.
The announcement
The Reserve Bank of New Zealand stated that “employment remains around its maximum sustainable level while inflation remains below the 2% target”, giving the MPC the need to keep things as they were.
Cutting interest rates to stimulate growth is something they may be looking towards in the future. At this point, though, with employment as strong as it is, the board decided it would be a bit premature to cut rates.
The Monetary Policy Committee also noted that trading partner growth had slowed down, as did growth in global trade overall. This is something beyond the purview of the board, and certainly beyond anything it can do.
Acknowledging this, in a sense, gives the MPC an excuse to wait for further results and keep some of their options open. Because of this, the next announcement will be even more significantly scrutinized.
The MPC did say that interest rates will remain at low levels for a prolonged time, as inflation is far from its targets. As such, there should continue to be some negative pressure on the currency, plus some skepticism when it comes to the New Zealand economy. This should not be much of a surprise considering that the New Zealand economy is so highly levered to Asia and the rest of the world.
there should continue to be some negative pressure on the currency, and some skepticism when it comes to the New Zealand economy
For now, the market continues to look at New Zealand through that prism more than anything else, so not much will change beyond the short-term shake-out.
Going forward
It appears that the path forward for New Zealand is going to be the same as the rest of the central banks around the world: simply sitting still and waiting to see whether or not there are more interest rate cuts necessary. In other words, they have joined the malaise that other central banks around the world have been feeling.
Unfortunately for New Zealand and its neighbor Australia, they are highly levered to the rest of the world. That means there’s only so much they can do when it comes to their own policy, as external factors will continue to be the biggest problem. Expect weakness out of Wellington, and based on the announcement, it’s very likely that they are simply waiting in case they need to cut even further.
