RBNZ Cautious, but Sticking with Forecast For Stronger Economic Growth

James Hyerczyk
Updated
Despite the weaker outlook, and an indication that the next move in interest rates could be lower, the New Zealand Dollar is soaring against the U.S. Dollar early Wednesday. This suggests a “sell the rumor, buy the fact” reaction to an oversold market.

The New Zealand Dollar spiked to the upside early Wednesday after the Reserve Bank left its official cash rate (OCR) unchanged at 1.75 percent, while maintaining its neutral stance.

The RBNZ said it would keep the OCR at an expansionary level for a considerable period to help in maximizing sustainable employment, and maintaining low and stable inflation.

At 03:27 GMT, the NZD/USD is trading .6811, up 0.0074 or +1.10%.

Quick Recap of RBA Interest Rate and Monetary Policy Decisions

The language of the new monetary policy statement showed little change from the last one in November. Although the decision to leave rates unchanged was widely expected, traders were looking for a more dovish tone from the central bank in the statement.

Ahead of the monetary policy decision, futures traders were pricing in close to a 40% chance of an RBNZ rate cut by May. The NZD/USD posted a huge gain after the announcement because the monetary policy statement was less-dovish than expected. This caused short-sellers who were caught on the wrong side of the news to aggressively cover their positions.

The Details

The Reserve Bank of New Zealand (RBNZ) trimmed its growth forecasts amid the slowdown in the global economy, but it maintained its call for solid economic growth this year.

In addition to leaving its Official Cash Rate (OCR) unchanged at 1.75 percent, it surprised investors when it indicated the benchmark rate was likely to stay at this level into 2021.

Furthermore, updated forecasts showed the economy is expected to grow at around 3 percent in 2019, faster than in the second half of 2018, but below its December forecast.

RBNZ Governor Adrian Orr Speaks

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from,” Reserve Bank governor Adrian Orr said.

“The risk of a sharper downturn in trading-partner growth has also heightened over recent months.”

While acknowledging overseas factors were weakening, Orr went on to say that low interest rates and strong government spending were expected to “support a pick-up in New Zealand’s economic growth over 2019”.

The RBA also addressed issues affecting the housing market, forecasting in real terms that house prices were expected to be flat over the next few years. Furthermore, Governor Orr acknowledged the Auckland housing market was “without doubt negative” while house prices in some markets remained strong.

Furthermore, Orr did not foresee a sharp fall in prices. “There are so many factors that are supporting that asset class at the moment,” Orr said.

Conclusion

Despite the weaker outlook, and an indication that the next move in interest rates could be lower, the New Zealand Dollar is soaring against the U.S. Dollar early Wednesday. This suggests a “sell the rumor, buy the fact” reaction to an oversold market.

The RBNZ monetary policy statement was a little more cautious than previous reports. Nonetheless, the central bank is sticking with its predictions for a stronger economy later in the year. Simply stated, the price action suggests investors are giving the central bank the benefit of the doubt. However, if this economic momentum fails to appear, then there is a chance of an interest rate cut later in the year.

This article was originally posted on FX Empire

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