NZD/USD remains weak near 0.6150 with all eyes on the RBNZ rate decision

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are to achieve and maintain price stability – achieved when inflation, as measured by the Consumer Price Index (CPI), is between 1% and 3% – and to support maximum sustainable employment.

The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) decides the appropriate level of the Official Cash Rate (OCR) based on its objectives. When inflation is above target, the bank will try to tame it by raising the key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the NZD.

Employment is important to the Reserve Bank of New Zealand (RBNZ) as a tight labor market can fuel inflation. The RBNZ’s target of “sustainable maximum employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration of inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, eventually prices will rise faster and faster, forcing the MPC to raise interest rates to keep inflation under control,” the bank says .

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can implement a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim of increasing the domestic money supply and stimulating economic activity. QE usually leads to a weaker New Zealand dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the central bank’s objectives. The RBNZ used it during the Covid-19 pandemic.