The Reserve Bank of New Zealand caught the market by surprise, slashing its benchmark Official Cash Rate today. The New Zealand dollar dropped more than 1% immediately after the announcement.
The RBNZ cut its main interest rate by 25 basis points to 2.25% by the end of the Wednesday’s session. It was a total surprise to market participants as they were counting on the monetary policy to remain the same. Furthermore, RBNZ Governor Graeme Wheeler signaled that additional rate cuts are possible:
Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.
Wheeler cited the economic slowdown in China and other regions of the world as the main source of concern outside of New Zealand:
The outlook for global growth has deteriorated since the December Monetary Policy Statement, due to weaker growth in China and other emerging markets, and slower growth in Europe.
As for domestic fundamentals, he said:
The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.
USD/NZD dropped 1.4% from 0.6744 to 0.6649 as of 22:15 GMT today, retreating from the daily high of 0.6808. EUR/NZD climbed 1.2% from 1.6320 to 1.6523 after touching the low of 1.6139. NZD/JPY opened at 75.94, soared to 76.97 during the trading session but backed off to 75.37 as of now.
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