As widely expected, the Reserve Bank of New Zealand left the official cash rate (OCR) unchanged today at 2.0%. This follows last month’s decision, which cut the rate by 25bps from 2.25% to 2.0% because growth and inflation remained on the downside.
The Bank’s Tone
The bank showed a somewhat dovish tone (negative) towards local and global growth, stating that significant surprise capacity remains across many economies. Given that it is accompanied by low commodity prices, this is notably suppressing global inflation. Moreover, the bank showed its concern towards the latest increase in market volatility, with government bond yields rising and equities coming off their highs. The prospects for global growth and commodity prices remain uncertain, especially while coming along with political uncertainty. In short, the bank will follow global developments and will be ready to ease its monetary policy further if needed.
The bank noted that the Second Quarter GDP results were consistent with the bank’s growth expectations. The bank is expecting that these results will remain within the same levels because they are supported by strong net immigration, construction activity, tourism and the current accommodative monetary policy.
As we all know, due to the latest decline in crude prices, global inflation is well below central banks’ targets. This is also one of the bank’s concerns. The bank expects inflation to stay low for some time, with a possibility to decline even further.
Why NZD Strengthen Despite Dovish Statement
This is directly linked to the Federal Reserve’s decision last night, which came before the RBNZ decision. The Fed kept the Fed Fund Rate unchanged, but with more than a 50% possibility to raise rates. Moreover, Janet Yellen showed a dovish tone in her press conference, which pushed market expectations away from a December rate hike as well. This pushed equities and commodities higher as the US Dollar declined across the board.
The New Zealand Dollar has shown some strength since Mid-September until today. It retraced to around 0.72xx area, reaching as high as 0.7360s so far. In the meantime, the New Zealand Dollar against the Dollar is trading within an uptrend channel, which seems to be solid. The upper band of this channel stands at 0.7370s, while the lower band stands around 0.7290s. The outlook remains bullish as long as it stays within the uptrend channel.
Levels To Watch