The New Zealand dollar climbed sharply against all other most-traded currencies today after the Reserve Bank of New Zealand surprised markets by leaving interest rates unchanged. While the kiwi has retreated from day’s highs by now, it is still trading far above the opening level, retaining most of its gains.
The RBNZ decided to keep its main interest rate stable at 1% at today’s monetary policy meeting. That was a shocking decision to market participants as the general consensus was that the central bank would cut the Official Cash Rate by 25 basis points to 0.75%. The bank explained its decision in a statement, saying:
Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time.
The central bank admitted that the domestic economy did not look strong:
Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending. We expect economic growth to remain subdued over the remainder of the calendar year.
Overseas economic developments did not look good either:
Trading-partner growth has also slowed. Growth in global trade and manufacturing is weak and uncertainty remains high, dampening global business investment.
The statement mentioned yesterday’s data that showed a decline in inflation expectations. But policymakers were not particularly bothered by the report:
Nevertheless, long-term inflation expectations remain anchored at close to the 2 percent target mid-point and market measures of inflation expectations have increased from their recent lows.
Rate setters discussed both options: leaving the OCR unchanged and cutting it by 25 basis points. Ultimately though, policymakers decided to wait, arguing that they need more time for assessing the impact of the previous monetary policy adjustment on the economy:
The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.
The statement predicted that interest rates will likely remain low for a prolonged period of time:
Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range and employment remains around its maximum sustainable level.
Additionally, the RBNZ signaled that it is ready to ease monetary policy further if necessary:
The Committee noted that the risks to the economy in the near term were tilted to the downside and agreed it would add further monetary stimulus if economic developments warranted it.
NZD/USD gained from 0.6329 to 0.6389 as of 11:48 GMT today, reaching the high of 0.6419 intraday. EUR/NZD declined from 1.7381 to 1.7226, and its session low was at 1.7156. NZD/JPY rallied from 68.96 to 69.56, touching the high of 69.89 during the trading session.
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