New Zealand Dollar (NZD) Surges as RBNZ Signals Interest Rate Stability

Earlier this week the New Zealand Dollar crashed and burned as a threat made against New Zealand’s primary export reduced demand for the commodity-driven currency. It was revealed that environmental activists had threatened to contaminate the nation’s supply of baby formula if the government didn’t ban the use of certain pesticides. Although industry experts were quick to assure markets that the threat to formula supplies was microscopic, the damage was done and a sharp drop off in orders was reported. According to Michael Barnett of the New Zealand Infant Formula Exporters Association; ‘We’ve had our first response from the distribution network. They’ve reduced their orders, some of them by up to 70%.’

However, the Reserve Bank of New Zealand’s interest rate announcement saw the New Zealand Dollar rebound. Many economists had voiced concerns that the RBNZ might follow the lead of the Bank of Canada and Reserve Bank of Australia by introducing an interest rate cut in order to counter the impact of sliding oil prices, but the central bank calmed these fears. After leaving the Overnight Cash Rate at 3.5%, the central bank indicated that interest rates will remain on hold for the foreseeable future.

The RBNZ stated; ‘The domestic economy remains strong. The fall in petrol prices has increased households’ purchasing power and lowered the cost of doing business. Employment and construction activity are strong. Net immigration remains high, and monetary policy continues to be supportive. The housing market is showing signs of picking up, particularly in Auckland. However, there are a number of factors weighing on domestic growth, including drought conditions in parts of the country, fiscal consolidation, reduced dairy incomes, and the high exchange rate. [...] Monetary policy remains focused on ensuring inflation settles at 2% over the medium term. As the economy expands, inflation returns gradually towards the midpoint of the target range. Our central projection is consistent with a period of stability in the OCR. However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.’

However, the central bank did add; ‘On a trade-weighted basis, the New Zealand Dollar remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals. A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing.’

After the decision was announced the New Zealand Dollar gained by 0.8% against the Pound, 1.2% against the US Dollar and 0.7% against the Euro. The New Zealand Dollar to Australian Dollar currency pair’s gains were limited as the ‘Aussie’ derived support from better-than-expected domestic employment figures.