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The Monetary Policy Committee of the Reserve Bank of New Zealand expectedly left the interest rate unchanged at 1.50 per cent after deliberating on the most recent economic data in the country. The central bank also sent strong signals about possible near-term cuts in the rate in case that the underlying economic conditions fail to improve, and it becomes evident that a more accommodative monetary policy is needed.
In our weekly expectations analysis on, we argued that presently the most significant point of concern for the policymakers is the deteriorating inflation rate, which fell from 1.9 per cent to 1.5 per cent in the last quarter. In this way, the rate of inflation becomes the primary indicator, that could sway the ultimate decision for future changes in the interest rate in either direction. In its post-meeting statement, the MPC of the RBNZ commented on the current state of inflation:
"We expect low interest rates and increased government spending to support a lift in economic growth and employment. Inflation is expected to rise to the 2 per cent mid-point of our target range […] Given the downside risks around the employment and inflation outlook, a lower OCR may be needed. […] Relative to the May statement, the Committee agreed that the risks to achieving its consumer price inflation and maximum sustainable employment objectives are tilted to the downside.” [source]
Overall, the MPC also observed the hampering effect that the limited international trade is exerting on domestic economic growth, and also noted the readiness of some other central banks to lower their interest rates to make up for the incurred deficits from global trade.
The Committee also agreed that an additional monetary stimulus might be necessary to encourage the subdued domestic demand and compensate for the continued falls in global growth.
"The Committee discussed the merits of lowering the OCR at this meeting. However, the Committee reached a consensus to hold the OCR at 1.5 per cent. They noted a lower OCR might be needed over time."
The above statement is completely inlined with our initial expectations from Monday for a very likely rate cut, that could have been executed even today. Regardless, the current reluctance of the RBNZ to move forward with vigour means that it would take minimal persuasion during the next session of the Committee for the rate to be lowered, provided that the economic conditions remain unchanged or have even deteriorated.
Following the release of the statement, the NZDUSD temporary fell because of the dovish remarks of the RBNZ, but then it quickly reversed its direction to register over 0.40% gains in the daily trading session. The currency pair is currently going on its eighth consecutive day in a bullish streak, and the price action is nearing a fundamentally important resistance level.
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