The New Zealand Central Bank has joined the global trend of moving away from interest rates hike, even indicating that its next move is likely to decrease the benchmark interest rate. This led to the most dramatic depreciation of the New Zealand dollar in seven weeks.
“Given the weaker outlook for the global economy and the declining inertia of domestic spending, it is more likely that our next move will be decreasing of interest rates”, said the Governor of the Reserve Bank of New Zealand, Adrian Orr. The statement was made after today’s meeting of the country’s financial regulator, which was decided to maintain the interest rate at a level of 1.75%.
Adrian Orr also explained that underlying inflation remains below the 2% target, which calls for a weaker monetary policy.
The change in the policy of the New Zealand Central Bank corresponds to the other central banks that have become more cautious because of the slowdown in global economic growth and the risks to inflation.
The US Federal Reserve has signaled that no interest rate hikes are expected in 2019, while the Reserve Bank of Australia has also dropped its monetary policy tightening.
The Governor of the Reserve Bank of New Zealand also said that it was precisely the recent changes in the policies of the Fed and the Australian central bank that put pressure on the local currency.
If the central bank representatives were neutral, it would send the New Zealand dollar straight to the moon.
The New Zealand dollar declined by 1.6% after the central bank’s statement, NZD/USD pair dropping 100 pips to 0.68163 USD. Meanwhile, the 10-year New Zealand bond yield has shed 10 basis points.
Earlier, the markets currently had been calculating at least one New Zealand interest rate cut by 25 basis points by August and expecting another one in the last quarter of 2020. However, following the publication of the central bank statement, they predicted a one-time interest rate cut in May, followed by a second one later in 2019.
In February, the New Zealand Central Bank predicted an increase in interest rates in the first quarter of 2021, lowering its inflation forecast, saying it expects prices to rise by just 1.4% this year.
Adrian Orr said on Wednesday that he expected low interest rates and government spending to support economic growth.