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New Zealand Dollar Slides Over 2 Cents After RBNZ Maintains Neutral Stance

 

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The New Zealand Dollar (Kiwi) Weakened on Thursday after the Reserve Bank of New Zealand (RBNZ) disappointed investors who had been expecting a rate hike by saying they were not gearing up to raise interest rates any earlier.

GBP/NZD went from 1.8650 to the Pound to 1.8880 - an increase of over 2 cents - during RBNZ governer's Wheeler's address.

A recent swell in positive economic data had led many analysts to expect a change in stance from neutral to hawkish – which means in favour of higher interest rates, however, apart from acknowledging that international risks had eased, they did not substantially change their position.

Analyst David Forrester at Credit Agricole had forecast that the RBNZ would at least bring forward the time when they would expect to raise interest rates, from the third quarter of 2019 to the last quarter of 2018, but this failed to happen.

A rise of 2.2% in inflation in the fourth quarter of 2016 had led market participants to expect the RBNZ to consider raising rates, as well the fall in unemployment to 4.9%, however, the RBNZ said in their May rate meeting statement that price pressures had come about mainly because of a rise in food and fuel inflation not core inflation, and they, therefore, saw it as only temporary.

The Bank said they were happy with the Kiwi’s recent weakness which saw the Trade Weighted Index of the currency fall by 5.0%, adding even more weight to the message that they would not be raising interest rates anytime soon (as this would have the effect of strengthening the currency).

They also highlighted the risk that house prices might rebound given the lack of supply.

Rapidly rising house prices, especially in Auckland, led the RBNZ to institute macro-prudential policies last year making it difficult for borrowers to qualify for loans, however, the threat of a bubble forming still remains.

This makes it unlikely the RBNZ will consider reducing interest rates either, thus arguing for a neutral stance for the foreseeable future.

In a response the RBNZ rate meeting, Aussie-based advisory service St George Economics, said:

“The comments suggest that interest rates are unlikely to be lifted in the near-term.”

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