Talking Points- RBNZ cut its benchmark lending rate to 2.75% as expected.
- New Zealand Dollar fell more than 1.5% versus the US Dollar.
- The central bank appeared to strengthen its dovish outlook.
The New Zealand dollar declined more than 1.5 percent (over 95 pips) versus the US dollar. The drop came after the Reserve Bank of New Zealand cut its benchmark lending rate from 3.00 percent to 2.75. This highly anticipated policy decision was the third consecutive adjustment since the central bank began easing this year. The last time the RBNZ cut its cash rate for three consecutive meetings was in 2008.
The central bank’s Governor, Graeme Wheeler, stressed that they have the potential to cut rates substantially as needed, with plenty in the tank if things get worse than expected. Indeed, the country currently has a higher interest rate compared to its major peers. The RBNZ’s monetary policy outlook appeared to be more dovish than its July statement. After the rate decision crossed the wires, New Zealand government bond yields declined across the board. This likely suggests that the markets are anticipating further easing from the RBNZ in the near term.
Additionally, Graeme Wheeler said that New Zealand’s economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate. He also stated that the economy is growing at an annual rate of around two percent. Furthermore, the Governor noted that export and import-competing sectors are supported by lower exchange rates. Looking abroad, a significant Chinese yuan devaluation would be a major concern. Further depreciation in the New Zealand dollar is appropriate.
