New Zealand’s RBNZ to cut interest rate by 50 bps amid deepening economic recession

VaselineOctober 8, 2024

0 5 minutes read

New Zealand’s RBNZ to cut interest rate by 50 bps amid deepening economic recession

The Reserve Bank of New Zealand is expected to cut interest rates by 50 bps to 4.75% on Wednesday.
New Zealand’s deepening economic decline and inflation optimism have weighed on RBNZ rate cut bets.
RBNZ policy announcements will inject intense volatility into the NZD.

The Reserve Bank of New Zealand (RBNZ) is set to follow in the footsteps of the US Federal Reserve (Fed) when it announces its interest rate decision at 01:00 GMT on Wednesday.

New Zealand’s central bank will not publish quarterly economic projections alongside its policy statement. There will be no press conference by Governor Adrian Orr.

What to expect from the RBNZ interest rate decision?

The RBNZ is expected to cut the official cash rate (OCR) by 50 basis points (bps) from 5.25% to 4.75% following its October monetary policy meeting. The central bank offered a surprise 25 bps interest rate cut in August.

Since then, there has been no major macro news except for New Zealand’s June quarter Gross Domestic Product (GDP) report. Data released by Statistics New Zealand on September 19 showed GDP fell 0.2% in Q2 from a revised 0.1% increase in the previous quarter. Economists had expected a 0.4% contraction in the reported period, while the RBNZ had forecast a 0.5% drop.

Despite a smaller-than-expected contraction in Q2 GDP, the downward trend in inflation and slowing economic activity are helping to build a case around a potential 50bps cut by the RBNZ this week. However, persistent non-tradable inflation in New Zealand and a strong revival in business confidence could lead the RBNZ to opt for a smaller rate cut in November.

“The latest RBNZ projections have headline CPI at 2.3% and non-traded CPI at 5.1% in the third quarter,” noted FX strategists at ING.

“We see a non-negligible risk of inflation falling below the 2% target range in the middle, but non-tradable CPI should continue to be firmer. Consequently, this 50bp cut may be a one-off move, with the RBNZ reverting to gradual 25bp cuts at a terminal rate close to 3%, they added.

How will the RBNZ interest rate decision affect the New Zealand dollar?

The New Zealand dollar (NZD) is nearing a one-month low against the US dollar (USD) near 0.6100 as markets fully bid for a 50bps RBNZ rate cut on Wednesday. Meanwhile, the USD is broadly higher as September’s strong non-farm payrolls (NFP) data led markets to rule out an excessive Fed rate cut in November.

In terms of RBNZ policy announcements, the NZD/USD pair appears to be exposed to two-way risk as its fate hinges on the central bank’s communication on the size and pace of future rate cuts.

If the central bank cuts OCR by 50bps, but surprises with a cautious tone in its policy statement, dismissing expectations of further rate cuts, the NZD is likely to find fresh demand. In such a case, NZD/USD could see a strong retracement towards the 0.6300 level. A surprise 25bps rate cut by the RBNZ could also reinvigorate NZD buyers.

On the other hand, NZD/USD could see a renewed downtrend towards 0.6000 if the RBNZ acknowledges the progress of disinflation while expressing concern about economic pain, leaving the door open for more rate cuts .

FXStreet Senior Analyst Dhwani Mehta provides a brief technical outlook for NZD trading on the RBNZ policy announcements: “NZD/USD challenges critical 200-day simple moving average (SMA) at 0.6099 as 14- The Day Relative Strength Index (RSI) remains deep in bearish territory.”

“If buyers manage to defend the key 200-day SMA, it could initiate a rally towards the 21-day SMA at 0.6226. Before that, the 50-day SMA at 0.6157 could come into play. Alternatively, a sustained break below the 200-day SMA could fuel a fresh downtrend towards the 0.6000 level, below which the August 16 low at 0.5978 will be tested,” adds Dhwani.

New Zealand Dollar PRICE This month

The table below shows the percentage change of the New Zealand Dollar (NZD) against the major listed currencies this month. The New Zealand dollar was the weakest against the US dollar.

	USD	EURO	GBP	JPY	CAD	AUD	NZD	CHF
USD		1.37%	2.18%	2.84%	0.89%	2.78%	3.77%	1.06%
EURO	-1.37%		0.78%	1.44%	-0.48%	1.39%	2.36%	-0.32%
GBP	-2.18%	-0.78%		0.66%	-1.26%	0.60%	1.58%	-1.08%
JPY	-2.84%	-1.44%	-0.66%		-1.89%	-0.05%	0.91%	-1.72%
CAD	-0.89%	0.48%	1.26%	1.89%		1.88%	2.86%	0.17%
AUD	-2.78%	-1.39%	-0.60%	0.05%	-1.88%		0.96%	-1.69%
NZD	-3.77%	-2.36%	-1.58%	-0.91%	-2.86%	-0.96%		-2.61%
CHF	-1.06%	0.32%	1.08%	1.72%	-0.17%	1.69%	2.61%

The heatmap shows the percentage changes of major currencies against each other. The base currency is chosen from the left column, while the quoted currency is chosen from the top row. For example, if you choose the New Zealand dollar in the left column and move along the horizontal line to the US dollar, the percentage change shown in the box will be NZD (base)/USD (quote).

New Zealand Dollar FAQ

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is largely determined by the health of the New Zealand economy and the policy of the country’s central bank. However, there are some unique features that can make the NZD move as well. The performance of the Chinese economy tends to move Kiwis as China is New Zealand’s largest trading partner. Bad news for the Chinese economy likely means fewer New Zealand exports to the country, hitting the economy and therefore its currency. Another factor that moves the NZD is the price of dairy products, as the dairy industry is New Zealand’s main export. High dairy prices boost export earnings, contributing positively to the economy and thus the NZD.

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate of between 1% and 3% over the medium term, with a focus on keeping it close to the 2% midpoint. For this purpose, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will raise interest rates to cool the economy, but this move will also raise bond yields, increasing the attractiveness of investors to invest in the country and thus boosting the NZD. Conversely, lower interest rates tend to weaken the NZD. The so-called rate differential, or how New Zealand rates are or are expected to be compared to those set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

Macroeconomic data released in New Zealand is key to assessing the state of the economy and can impact the valuation of the New Zealand dollar (NZD). A strong economy based on high growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to raise interest rates if this economic strength is coupled with increased inflation. Conversely, if economic data is weak, the NZD is likely to depreciate.

The New Zealand Dollar (NZD) tends to strengthen during periods of risk or when investors perceive broader market risks to be low and are bullish on growth. This tends to lead to a more favorable outlook for commodities and so-called “commodity currencies” such as the kiwi. Conversely, the NZD tends to weaken during periods of market turbulence or economic uncertainty as investors tend to sell riskier assets and flee to more stable havens.

VaselineOctober 8, 2024

0 5 minutes read

What to expect from the RBNZ interest rate decision?

How will the RBNZ interest rate decision affect the New Zealand dollar?

New Zealand Dollar PRICE This month

New Zealand Dollar FAQ

Vaseline

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