Coming up: New Zealand Interest Rate Decision

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Interest rate decisions are routinely one of the major events that most affect currencies. But despite some of the press speculation, the consensus among analysts is that the RBNZ is likely to stay the course.

Scrutiny will be on the policy statement from the decision. However, with little change expected, the kiwi could sail through with less volatility. Here’s what could happen and why.

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Schedule and Expectations

The interest rate decision is the only major macro event for the day likely to affect the NZD.  The decision and the rate statement are set to be released concurrently on Thursday at 02:00 CET (which would be Wednesday at 21:00 EST). This is what is known as a “small” meeting in that there is no press conference scheduled afterward.

There is a broad consensus that the rate will stay at 1.75%. So, what we’d be looking for is a change in the language and expectations in the statement. Here are a couple of key considerations:

  • Last time, the governor said that the next move could be either up or down. If that is omitted this time, it would be seen as a return to the prior upward bias. If it’s changed, it would likely be to say that he expects the next move to be down. That will logically put the NZD under pressure.
  • Regarding the outlook for GDP growth for the remainder of the year, last time around the RBNZ affirmed their outlook of 3.0% growth. This year, a revision to the downside would also be negative for the kiwi dollar. A revision higher, on the other hand, would reflect the better data from the last quarter and be something of a surprise for the markets.

There’s No New Data

Since the last meeting of the reserve bank, there has only been one top-tier macro data release, which was GDP. So, without a wealth of new evidence to sway the bank’s view, there isn’t much to cause speculation that there will be a change in policy.

About that quarterly GDP data, though, the first quarter grew by 0.6%, a doubling over the prior quarter. While this might sound good at first glance, it’s still below the 0.8% that the reserve bank had projected. Even though the market reacted positively, it might not be positive enough to sway the bank’s outlook.

Over the last several years, New Zealand’s quarterly GDP has routinely come in at 0.9% growth with only brief drops. 0.6% was still below the near-term average.

The Environment

The weakness in the performance of the Kiwi economy is multifaceted but largely due to external factors. These include the restriction on sending money overseas from major economies like China (a primary source of infrastructure investment capital), Japan and the US. Broader weakness in the world economy can also be filtering through to the highly open economy.

Some analysts speculated that the economic situation is such that last meeting, the reserve bank even discussed (if not almost proposed) a rate cut. This would mirror a change in the outlook seen by the RBA, with the two countries’ economies largely attached by the hip. However, the argument against this notion is that economic data from NZ has mostly remained positive.

It’s About Trade

The bottom line is that a primary way to stimulate an economy is by weakening the currency. And while the RBNZ is not mandated to promote economic growth, it is still a major concern. A lower exchange rate would help exporters and support inflation. With economic underperformance around the world and talks of easing from the RBA, if New Zealand doesn’t adjust its outlook downwards, it will find itself in a dwindling minority.

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