FXStreet (Delhi) – James Knightley, Senior Economist at ING, notes that the RBNZ cut rates 25bp, in part to try and weaken the currency, yet it actually strengthened as the RBNZ signally we are at the bottom for cash rate.
Key Quotes
“The Reserve Bank of New Zealand cut its policy rate 25bp to 2.50%, in line with our expectations, in no small part due to recent currency strength and ongoing commodity rice weakness. The statement suggested that “the rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth”. They also cited increase in labour supply from net immigration, which has contributed to an “increase in spare capacity and unemployment”.”
“Nonetheless, the RBNZ remain relatively upbeat on economic prospects over the medium term and believe that inflation is likely to move into the 1-3% inflation target range “from early 2016”. Moreover they believe that future average inflation will settle near the middle of the target range. Significantly, “We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant”.”
“Consequently, the market has taken this as a signal that rates are likely to have bottomed and given the high level of cash rate relative to all other developed markets, we have seen the New Zealand dollar bounce. It isn’t exactly what the RBNZ would have liked, but given the economy is likely to grow by around 2.5% next year we believe that the next move in rates will be higher, although not before 3Q16.”
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