NZ: RBNZ Announcement

Wed Mar 09 14:00:00 CST 2016

Consensus Actual Previous
change 0bp -25bp 0bp
Level 2.5% 2.25% 2.5%

The RBNZ did the unexpected and lowered its official cash rate by 25 basis points to 2.25 percent. Analysts had been divided over whether the RBNZ would stand pat or not on this occasion, after it left the door open to further easing following its last policy meeting in January.

Rate decisions from the RBNZ have attracted much attention in recent years. In March 2014 New Zealand became the only developed economy in the world to raise rates since the 2008 financial crisis. Policymakers followed through with three further increases, taking OCR from 2.5 percent to 3.5 percent within the space of five months. But the RBNZ went into reverse in 2015, easing in June, July, September and December.

The twin drivers of the New Zealand economy over the past decade have been dairy exports and tourists coming in. But both are facing headwinds. A weaker Aussie dollar, economic slowdown in China and falling dairy prices are all creating pressure. At the same time, economists fret that low interest rates are fueling an unsustainable house price boom in some areas and especially in Christchurch where the rebuilding after the massive earthquakes continues.

The policy guidance paragraph was: "Headline inflation is expected to move higher over 2016, but take longer to reach the target range. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data."

The New Zealand dollar or Kiwi tumbled after the announcement.

Eight times a year, the Reserve Bank of New Zealand meets and decides whether to change or maintain New Zealand's Official Cash Rate. The RBNZ is known for its clarity regarding monetary policy intentions, thus the result is usually foreseen in advance. The decision aligns with the Reserve Bank of New Zealand's monetary policy to spur or slow economic growth or affect the exchange rate.

The RBNZ maintains an inflationary target range of 1 percent to 3 percent and will change rates to keep it within such a range, making rate decisions fairly predictable. Rate changes are significant nonetheless, affecting interest rates in consumer loans, mortgages, and bond rates. Increases or even expectations for rate increases tend to cause the New Zealand Dollar to appreciate, while rate decreases cause the currency to depreciate.

The RBNZ determines interest rate policy at it policy meetings. These meetings occur roughly every six weeks and are one of the most influential events for the markets. Market participants speculate about the possibility of an interest rate change. However, since the Bank is known for its clarity in setting policy, the result is usually built into the markets in advance. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Eight times a year.