The New Zealand dollar is falling strongly, and the Central opens the door to further easing
The New Zealand dollar fell to its lowest levels in four months, influenced by the decision of the Reserve Bank of New Zealand (RBNZ) to cut interest rates by a quarter point as expected, but with more hawkish hints than the market expected, as the New Zealand Reserve left the door open for a new round of monetary easing in the coming months, prompting the New Zealand currency to decline by more than 1%.
Decision and forecast: reduction and threat of further cuts
In a move aimed at supporting economic growth, the central bank cut the official interest rate by 25 basis points to 3.0%, the lowest level it has recorded in three years.
This decision marks the seventh consecutive cut since August 2024, bringing the total interest rate cut during this cycle to 250 basis points.
And it was not the decision itself that was the big surprise, but the expectations and the language that surrounded it.
The bank has lowered its minimum interest rate forecast to 2.55%, from the 2.85% it had forecast last May, indicating that the corrective path is not over yet.
A split within the commission and a tendency towards sharp easing
Even more worrying was the split of the members of the 6-member Monetary Policy Committee, with two members voting in favor of an even larger 50 basis point cut.
This split is a strong signal that there is real concern within the bank about the health of the economy, and that there are strong tendencies towards adopting a more aggressive monetary policy to counter the expected slowdown.
The reason for pessimism: a comprehensive review of economic forecasts
The main reason for this accommodative attitude lies in the bank's pessimistic outlook towards domestic economic prospects.
In a move that reflects a clear decline in confidence, the bank made widespread and substantial cuts to its forecasts on several key indicators, most notably:
- Growth of gross domestic product.
- The unemployment rate.
- Growth of private sector wages.
This downward revision means that policymakers feel the need to act quickly and more aggressively to prevent further deterioration.
What's next Interest path forecasts
Against this background, market expectations have become clear: the probability of another cut at the next October meeting is estimated at about 50%, while a new cut is almost certainly expected (by more than 100%) in November, unless the economic data witness a sudden and unexpected improvement.
Market reaction: the dollar is falling, bonds are rising
The market reaction was immediate and sharp.
The New Zealand dollar (NZD) fell by more than 1%, trading near 0.5830 US dollars, the lowest rate recorded since mid-April.
In contrast, government bond prices have seen a sharp rise, as investors turn to safe havens expecting the low interest rate environment to last longer.
In the end, the RBNZ seems to be sending a clear message that the health of the local economy is ahead of its priorities on the strength of the currency. With the pessimistic outlook continuing and room for further cuts, the New Zealand dollar is likely to remain under pressure in the near term.
