New Zealand Dollar Declines Even as Inflation Beats Expectations

The New Zealand dollar declined today despite inflation data that came out better than was expected. There were several possible reasons for the currency’s decline, both domestic and global. Domestically, the monetary policy outlook remained dovish despite the better-than-expected inflation report. Globally, increasing geopolitical tensions between the United States and China over Hong Kong and the global economic slowdown lessened the appeal of riskier commodity-related currencies. Currencies of Australia and New Zealand were especially vulnerable due to the countries’ strong trading ties to China.
Statistics New Zealand reported that the Consumer Price Index rose 0.7% in the September quarter from the previous three months. Market participants were expecting the same 0.6% rate of growth as in the June quarter. With adjustments to seasonal variations, the CPI rose 0.5%. Year-on-year, the index rose 1.5%. That was a slower rate of growth than in the previous quarter (1.7%) but better than the consensus forecast (1.4%). The main contributors to the growth were housing and rising food prices.
Geoff Bascand, Deputy Governor of the Reserve Bank of New Zealand, said that additional interest rate cuts may be needed:

Lower rates still may be needed to achieve our inflation and maximum sustainable employment objectives.

Market participants speculated that today’s good inflation data reduced chances for a shockingly big cut by 50 basis points such as the one the RBNZ performed in August. But two or more smaller cuts by 25 basis points are still expected, one in November and another one sometime in the future, perhaps in February.
NZD/USD declined from 0.6290 to 0.6248 as of 11:19 GMT today, retreating from the daily high of 0.6319. EUR/NZD gained from 1.7518 to 1.7651, bouncing from the daily low of 1.7446. NZD/JPY declined from 68.47 to 67.94.

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