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CURRENCY ANALYSIS

New Zealand Dollar New All-Time Low

New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex

11 Mar 2016

To some extent by surprise, the Reserve Bank of New Zealand cut interest rates at its meeting of 9 March, from 2.50% to 2.25%. Consensus was for stable rates, although a small minority of forecasters had pointed to a cut.

Rates had already been brought down last year, from 3.50% to 2.50%, but on that occasion the move was mostly geared to a normalisation following the hikes implemented in 2014, a year in which the RBNZ was the only advanced economy central bank to step up rates, from 2.50% to 3.50% (Fig. 1). This month’s cut has placed New Zealand policy rates at a long-term low.

The RBNZ has explained that the decision was prompted by the deterioration of the global growth picture (most notably China and the emerging countries, but also Europe), despite the adoption of extraordinarily accommodative monetary policies. The volatility of the financial markets has increased, and commodity prices remain low. At the global level, therefore, downside risks still prevail, with negative repercussions on the New Zealand economy through two channels:

(1) The persisting weakness of the dairy industry, which accounts for the majority of exports;

(2) The drop in inflation expectations.

In its March Monetary Policy Statement, the RBNZ has again revised downwards it inflation projections (Fig. A). The forecast for 2016 has been cut from 1.2% to 0.4%, a very low level, below the floor of the 1%-3% target range, with a central goal of 2.0%. Inflation in 2017 was also revised, from 1.5% to 1.3%, i.e. at the lower end of the target range. A recovery to 2.0%is expected in 2018.

As it expects inflation to take longer to return to target than previously forecast, the central bank indicates that monetary policy will remain accommodative and that another rate cut could be necessary to help inflation return towards 2%.

New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig-ANew Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig-BSource: Reserve Bank of New Zealand

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