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Early on Wednesday morning, the Monetary Policy Committee (MPC) of the Reserve Bank of Australia announced its decision to keep the interest rate unchanged at 1 per cent, which was anticipated by the vast majority of market analysts and economists worldwide.
Arguably the most insightful aspect of the monetary policy statement was the proclamation that the period of low interest in New Zealand might be extended for longer than previously expected.
The MPC commented on the subdued inflation in the country, which is close but below its two per cent target. Additionally, the labour market is performing well at the maximum sustainable level for the time being. The Committee commented on the overall economic situation in the country by stating that:
“The Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook. […] Business confidence remains low in New Zealand, partly reflecting policy uncertainty and low profitability in some sectors, and is impacting investment decisions.” [source]
The business confidence index has been deteriorating consistently throughout 2019, mostly owing to the global trade uncertainty, which has become even more noticeable following the recent political developments in the Persian Gulf. It is because of these conditions that the global growth prospects remain muted; major central banks purposely keep their respective interest rates low and investors’ activity remains subdued.
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“Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services. […] Global long-term interest rates remain near historically low levels, consistent with low expected inflation and growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer.”
The admission of the possibility for prolongation of the low interest rates term in New Zealand is the most significant aspect of the monetary policy statement, which can have long-lasting consequences for the economy. Meanwhile, the market's initial reaction to the interest rate decision was more or less restrained, as investors are slowly absorbing the news.
The NZDUSD is currently trading at 0.63180 as the pair continues with its struggling to correct last week's major collapse when the price tumbled to levels last seen in September of 2015. The short-term bullish momentum is currently picking up, albeit at a moderate pace, and the price has already broken above a major resistance level at 0.63030. It is yet to be seen whether the market conviction is sufficient enough to support the formation of an entire bullish swing by the end of the week.
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