RBNZ Surprised With A 25bps Rate Cut As A “Reasonable First Step” Amidst Cooler Inflation And Slower Growth

The New Zealand Dollar fell sharply earlier today, and no, it’s not because your trading platform suffered from a “Massive DDoS attack.“

A few hours ago, the Reserve Bank of New Zealand surprised the markets with Official interest rate cut by 25 basis points to 5.25% While many market participants expected the rate to remain at 5.50%.

In its statement, the committee cited the following: Increased confidence that inflation will fall to its 2% target As one reason for lowering interest rates. That is, inflation expectations, business pricing behavior, and “a variety of core inflation measures” are now more consistent with low and stable inflation.

RBNZ members also expressed concern about “weak local economic activity”“It became clearer and broader.”

In particular, factors such as restrictive monetary policy, the greater impact of tighter fiscal policy, lower net migration, and measurement uncertainty in indicators of business activity, electronic card transactions, vehicle movements, home sales, and job openings and vacancies, all of which have been signs of weakness in recent months, may have contributed.

While the Reserve Bank of New Zealand is confident that “Monetary policy constraints can now begin to ease,“The pace of monetary policy easing will depend on inflation expectations and pricing behaviour in line with the 2% inflation target.

Link to the Reserve Bank of New Zealand’s August Monetary Policy Decision

The central bank’s most prominent forecasts for August 2024 further supported its dovish bias:

• The economy may witness Artistic stagnation With negative growth expected in Q2 2024 and Q3 2024
• Annual inflation It may reach 2.3% by the end of 2024 and decline to the target of 2.0% by the second quarter of 2026.
• the Unemployment rate It is expected to rise further and peak at 5.4% in the first quarter of 2025 before declining again.
• The Reserve Bank of New Zealand will continue to cut interest rates. Official exchange rateIt is expected to decline to 4.9% by the end of the year and to fall to 3.0% by 2027.

Link to the Reserve Bank of New Zealand’s August 2024 Economic Forecast

At his press conference, Reserve Bank of New Zealand Governor Adrian Orr reiterated the committee’s confidence that inflation was moving towards its target. He said they had considered “a range of moves” including a 50 basis point rate cut, but ultimately reached consensus on a 25 basis point rate cut.

The head of the Reserve Bank of New Zealand believes a 25 basis point interest rate cut is a “sensible first step” and that the central bank is in a “strong position” to move quietly with monetary easing.

Link to RBNZ press conference

New Zealand Dollar vs Major Currencies: 5 minutes

The New Zealand dollar, which had been strong ahead of the RBNZ decision, traded in tight ranges immediately before the report and fell sharply when the decision was published.

The New Zealand dollar took a breather from its losses for a while, but also saw fresh downward pressure when Governor Orr’s press conference hinted at more easing ahead.

The New Zealand dollar is trading in the red across the board, with the biggest losses against the Japanese yen, US dollar and Swiss franc, while it saw more limited losses against the Australian dollar, Canadian dollar and British pound.