RBNZ cut rates by 25 basis points, sending NZD/USD down to its lowest level since Nov. 1. With the rate cut, New Zealand's 10-year bond yield has hit the lowest since Apr. 1. The NZD/USD pair is feeling the pull of gravity, courtesy of the Reserve Bank of New Zealand's (RBNZ) decision to cut rates by 25 basis points to a new record low of 1.5%. The pair is currently trading at 0.6566, having dropped 75 pips to hit a session low of 0.6525 – the lowest level since Nov. 1 – immediately after the rate decision. It is worth noting that while most analysts had anticipated a rate cut, the probability as per the overnight index swap market was just 30%. The kiwi, therefore, could remain under pressure during the day ahead – more so, as New Zealand's government bond yields have dropped following the rate decision. As of writing, the benchmark 10-year yield is currently trading at 1.843%, down nearly five basis points on the day and at the lowest level since April 1. Meanwhile, the two-year yield, which is more sensitive to interest rate expectations, has slipped by more than four basis points to 1.4%. The RBNZ's decision to cut rates comes a day after the Reserve Bank of Australia held rates unchanged at 1.5%, defying expectations of a rate cut. Pivot points<doc-sep>Katrina Wittkamp / Getty The RBNZ cut New Zealand’s cash rate by 25 basis points to 1.5% in May, leaving it at a new record low. The decision was in line with economist exceptions. Financial markets had marginally favoured that rates would be left unchanged. The RBNZ cited international risks, along with downside risks for employment and inflation, as factors behind the decision to ease policy settings. It forecast a modest risk that policy rates could be cut again. The New Zealand dollar initially plunged on the news, falling to the lowest level since early November against the greenback, but has since recovered some of its initial losses. The Reserve Bank of New Zealand (RBNZ) cut official interest rates at its May monetary policy meeting. The cash rate was reduced by 25 basis points to 1.5%, marking the first adjustment in policy settings since rates were reduced in late 2016. The result was favoured by a slim majority of economists but not financial markets. “The Monetary Policy Committee decided a lower overnight cash rate (OCR) is necessary to support the outlook for employment and inflation consistent with its policy remit,” the RBNZ. “Global economic growth has slowed since mid-2018, easing demand for New Zealand’s goods and services. “This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects.” The RBNZ acknowledged uncertainty towards the global economic outlook was elevated, noting that while “trade concerns remain” some other indicators suggest “trading-partner growth is stabilising”. However, from a domestic standpoint, it saw the need to support activity levels given recent weakness in economic growth, inflation and employment. “Domestic growth slowed from the second half of 2018,” the bank said. “Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending.” “Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment.” With economic activity slowing, the RBNZ said softer employment growth would lead to continued weakness in inflation without additional monetary policy support. “The outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly,” it said. “Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.” The table below details the RBNZ updated economic forecasts. RBNZ The bank’s cash rate forecasts suggest there’s a risk, albeit not a meaningful one at this point, that it may cut rates again to 1.25% by early next year, a view in line similar to market pricing prior to today’s announcement. Explaining why it still believes further easing may be necessary, the bank doesn’t see inflation returning to the midpoint of its 1-3% target until the June quarter of 2021. That’s despite an expected lift in economic growth in the coming quarters and a modest depreciation in the New Zealand dollar over the same period. Ben Udy, Economist at Capital Economics, said today’s cut won’t be the last seen this year. “Subdued economic growth and a softening labour market mean that today’s interest rate cut by the RBNZ will be repeated before the year is out,” he said. “An acceleration in GDP growth in the first quarter may stave off another rate cut for the next few months, but as unemployment rises and growth remains subdued in the second half of the year, we think the bank will cut rates to 1.25% in November.” With financial markets marginally favouring that policy settings would remain steady at this meeting, the New Zealand dollar initially plunged on the announcement, slumping over 1% against the greenback to .6529, the lowest level since early November last year. It’s subsequently bounced in recent trade, currently fetching .6577. “We don’t expect a sustained fall in NZD because New Zealand’s commodity prices are high and rate cuts are already priced,” said Joseph Capurso, Senior Currency strategist at the Commonwealth. Business Insider Emails & Alerts Site highlights each day to your inbox. Email Address Join Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.<doc-sep>Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of Financial Services Council NZ - RBNZ cut interest rate to 1.5% - New Zealand Dollar falls, then recovers - But trend lower entrenched as RBNZ is now embedded in easing cycle The New Zealand Dollar fell sharply after the Reserve Bank of New Zealand (RBNZ) cut interest rates by 25 basis points, taking the OCR to 1.5% and signalled further interest rate cuts are likely over coming months. The move was not entirely unexpected by markets that have for some time suspected the RBNZ would be the first major global central bank that would cut interest rates. The New Zealand Dollar fell on the call, but soon recovered. The currency is more-or-less back to where it was ahead of the interest rate cut: The Pound-to-New Zealand Dollar exchange rate is quoted at 1.9840 at the time of writing, having been as high as 2.008 in the wake of the rate cut. The New Zealand-to-U.S. Dollar exchange rate is quoted at 0.6590 having been as low as 0.6519. Above: The knee-jerk response in the GBP/NZD to the rate cut. The statement released by the RBNZ noted downside risks to trading partner growth, particularly in China and its projections leave the door open to a further cut later in the year. The New Zealand Dollar has been trending lower since March when the market first began increasing bets that an interest rate cut was coming; the promise of further cuts should keep the trend of depreciation alive. For many years the RBNZ's base rate which sat at 1.75% was notably higher than the benchmarks set at other major central banks: the interest rate advantage attracted global capital inflows as yield-hungry investors sought out superior returns, bouying the New Zealand Dollar as a result. The tide is now turning on the New Zealand Dollar's relative interest rate advantage. "We expect the NZD to continue to lag its peers now that the RBNZ has entered into an easing cycle, while pricing should ebb and flow as markets regather after this Statement," says Sharon Zollner, Chief Economist at ANZ in Aukland. Above: The NZ Dollar has been trending lower since expectations for an interest rate cut at the RBNZ began to grow in earnest. However, the NZ Dollar's recovery since the interest rate cut was announced has surprised some. The explanation for the relatively robust response is that while markets expect further interest rate cuts in the future, the next cut is still likely a long way off. "It wasn’t all guns blazing, however: the forecast OCR track implied only a half chance of a further cut, sometime next year," says Zollner. We feel had a more aggressive stance been signposted by Governor Adrian Orr then the New Zealand Dollar would have come under greater pressure. "The RBNZ has downgraded its near-term outlook substantially, meaning the hurdle for a further cut is high for now. As before, we expect a further OCR cut in November, with one more cut to follow early next year," says Zollner. It's not just a slowing China that was behind the RBNZ's decision: domestic economic activity is of concern with the RBNZ saying: “The outlook for employment growth is more subdued and capacity pressure is expected to ease slightly”. “The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit.” As is usually the case with central bank policy decision making, it all boils down to inflation. Inflation in New Zealand has - like in much of the developed world - been disappointing for a prolonged period of time by trending well below the 2.0% target the RBNZ is tasked with maintaing. According to data, inflation has averaged 1.6% in New Zealand in the decade since the financial crisis, and "the RBNZ, which brought 2% inflation-targeting to the world, has had enough of this undershooting," says Kit Juckes, a foreign exchange strategist with Société Générale in London. According to Juckes, there is a wide significance to the RBNZ's reaction to stubbornly low inflation, and the RBNZ move could reflect a mood shift at many central banks. OECD inflation is above 2%, but has been trending lower again in recent months, Core CPI inflation in the G7 economies averages 1.5% and hasn't bene above 2% since then financial crisis. Over that period, it has averaged 1.4%. "For a long time, it was accepted wisdom that that's fine, in line with a view that 2% inflation-targeting means ‘close to but below 2%'. That's not good enough, for many," says Juckes. Whether or not central banks like the RBNZ will be able to revive inflation remains to be seen and Juckes thinks there FX space will soon be driven by central banks looking to stoke inflation and those happy to sit on inflation that runs below target. "The ones trying hard for higher inflation will end up with weaker currencies," says Juckes. "This group will eventually include the US, but strangely, not the UK (despite history telling us otherwise), and less strangely, not the Eurozone." Overnight we’ll hear more from RBNZ Governor Adrian Orr when he testifies about the Monetary Policy Statement at the Parliamentary Select Committee on Finance & Expenditure.<doc-sep>At its May monetary policy meeting on Wednesday, New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ) cut its Official Cash Rate (OCR) to fresh historic lows of 1.50% vs. 1.75% previous, as the economy cools and inflation falls further below target. Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page. If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet. FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted. The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.<doc-sep>
Australians are used to New Zealanders being ahead of us on the rugby field. But it may come as a surprise that our smaller neighbour has also been leading us in the financial field. Today, the Reserve Bank of New Zealand (RBNZ) elected to make the interest rate cut that Australia's central bank passed on yesterday. The RBNZ has decided to lower its official cash rate by 25 basis points, taking it down to the same level as Australia's at 1.5 per cent. While New Zealand's cash rate is now at the same level as Australia's, both countries had kept rates on hold for a similarly long time — the last cut was November 2016 across the ditch and August 2016 here. Market forecasts of a rate cut were very similar to Australia, with 14 of 20 economists surveyed by Bloomberg expecting a cut, but money markets only pricing in a 40 per cent chance of a downward move. Yet the RBNZ took the plunge with a rate cut, while the RBA stood pat for at least another month, and probably a couple more. And it's not because of vast differences in the countries' recent economic performance — on the contrary, you would struggle to find two more similar sets of data. Like Australia, New Zealand's annual growth rate has fallen sharply from more than 3 per cent early last year to 2.3 per cent by the end of December 2018. Also like Australia, New Zealand's monetary policy gurus were confronted with a surprising weakness in consumer price increases over the first three months of the year, with inflation at an annual rate of 1.5 per cent. That is pretty similar to Australia's core inflation rate, which Australia's Reserve Bank said was 1.6 per cent (although on another measure it is as low as 1.2 per cent). Moreover, the RBNZ's inflation target is more tolerant of low price rises than the RBA's, being set at 1-3 per cent, as opposed to 2-3 per cent. Seemingly the only substantial economic difference in New Zealand is that unemployment is already rising — but the increase from 4 per cent in September last year to 4.2 per cent in March still leaves its jobless rate well below Australia's 5 per cent. RBNZ seeks to get in front of the economic slowdown The decision to cut rates appears to be based on a different approach to monetary policy, with the RBNZ looking to support growth ahead of a substantial rise in the jobless rate. "Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly," the RBNZ said in its post-meeting statement. "Given this employment and inflation outlook, a lower OCR [overnight cash rate] now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates." Recently, Australia's Reserve Bank revealed its formula for a rate cut was continued low inflation plus a rise in unemployment. However, at yesterday's meeting, it seemed to have moved towards the RBNZ's approach. "[The RBA board] recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target," RBA governor Philip Lowe noted in his post-meeting statement. Like in New Zealand, it seems that stable unemployment near what economists used to consider "full employment" levels is not enough to boost wages and consumer prices in Australia. Yet the RBA wants to wait a little longer before doing anything about it. It's not the first time the Kiwis have been ahead of their trans-Tasman counterparts. New Zealand authorities moved first to place stricter home-lending restrictions on banks to cool its own overheating housing markets, before Australia's bank regulator APRA belatedly followed suit. Has the RBNZ again shown the way forward for its counterparts across the ditch?