New Zealand to Surprise Markets With an Interest Rate Cut?

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Following moves in other advanced economies, New Zealand might be the next nation poised to cut interest rates further.  Although considered highly unlikely with the consensus estimate for rates to remain unchanged at 3.50%, the uncertainty and volatility of the last two weeks might be the impetus needed for the Reserve Bank of New Zealand to reconsider its stance.  Coupled with Canada’s surprise cut last week and overnight data from Australia pointing to inflation still falling despite accommodative monetary policy, New Zealand might choose to follow suit into dovish territory.

The New Zealand Dollar is Weakening

The New Zealand Dollar is trending just off of lows not seen since 2011, in the sharpest move lower in years.  As recently as November, RBNZ Governor Wheeler was busy jawboning the currency lower, stating the currency was “over-valued” and “unjustified” at those levels.  The word unsustainable was also tossed around casually.  Since making those comments in November, further remarks have been largely absent meaning that either the RBNZ is comfortable with the level of the New Zealand Dollar or conversely they are nervous about the risks to the outlook and uneasy with the growing threat of a global slowdown.

Applying Interest Rates to Combat Deflation

New Zealand has proved staunchly opposed to monetary easing as evidenced by the rising interest rate environment witnessed in 2014 after the Central Bank hiked rates 100 basis points.  The country has generally tried to avoid tossing its hat into the ring of the global currency war, mainly sitting on the sidelines and observing.  However, those actions might prove inconsequential as deflation circles the globe, impacting developed economies.  Although GDP growth in New Zealand remains robust, reported at a 3.20% expansion annualized in the latest release, tumbling inflation is possible foreshadowing of encroaching deflation.  The CPI trend has been broadly biased to the downside since 2011, meaning the most potent tool to combat this factor is cutting the key interest rate.

The RBNZ has prototypically proved one of the more nimble Central Banking operations based on its size and scale.  The Central Bank’s policies are far more proactive relative to the reactive nature of Central Banks in other developed economies.  Keeping the export economy competitive is another strong rationale for dropping rates.  While most analysts have cited lower inflation and strong growth as a reason for keeping rates on hold despite expectations of another 25 basis point hike in the pipeline, the time has never been clearer to drop rates in order to keep weakening NZD.  If not now, then when?

Sustaining Growth

The RBNZ under the stewardship of Governor Wheeler has not been the type of Central Bank to just sit idly on its hands and do nothing.  As such, taking no action right now would not be in the nation’s best interest.  Although considered highly unlikely, a rate cut might prove just the right medicine to keep the economy stable and growing sustainably in the near-term as the headwinds to the global economy accelerate.

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