Despite the prevalent market forecasts for the RBNZ to maintain the interest rate at the previous 1.75% level, early today the central bank stated that it has decided to bring about a change to its monetary policy. The Reserve Bank of New Zealand was prompted to implement these changes after a noticeable difference in the underlying economic conditions of the country. The decision ultimately fulfilled our expectations that were raised in the previous market update, as we reasoned that the central bank has more than enough incentives to lower the interest rate.
“Ongoing low business sentiment, tighter profit margins, and competition for resources have restrained investment. […] Given the employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates” [source]
RBNZ’s remarks about the restrained investment in the economy because of the low business sentiment are inlined with the underperforming business investment index, which is yet another manifestation of the smaller national growth rate in the second quarter of 2018.
On the one hand, the monetary policy statement expressed concerns that the prospects for future employment growth are subdued, because at the present rate the domestic labour market seems to have reached “maximum sustainable level”. Hence, a change in RBNZ was needed to stimulate the much desired future improvements in employment data.
On the other hand, “Inflationary pressure is expected to rise only slowly”, further demonstrating the necessity for a monetary change that cannot be postponed any longer lest running the risk of further slowing down of the economic growth.
The initial shock from the lowering of the interest rate caused the NZDUSD pair to fall in the early hours of today’s trading session, but then the general market sentiment changed at it became apparent that RBNZ’s new monetary stance is going to be more accommodative of future growth. The currency pair corrected the initial losses and moved back above the previously outlined significant support level at 0.65905.
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