The NZD/USD pair is down 0.7% to near 0.6000 during the Asian trading session on Wednesday, following the monetary policy announcement by the Reserve Bank of New Zealand (RBNZ).
The New Zealand Dollar (NZD) has come under severe pressure as RBNZ Governor Anna Breman pushes back hopes of interest rate hikes in the near term in her remarks at the debut press conference after leaving the Official Cash Rate (OCR) unchanged at 2.25%, as expected.
“Not planning to hike until we see a stronger economy, more inflationary pressure,” Breman said, and added, “There is possibility of rate hike by end of year.” Her comments were in contrast to what market experts anticipated before the monetary policy announcement. Analysts at ING said in a report that they anticipate the New Zealand (NZ) central bank to deliver two interest rate hikes in the third quarter this year.
Meanwhile, the US Dollar (USD) trades marginally higher ahead of the release of Federal Open Market Committee (FOMC) minutes of the January policy meeting, which will be published during the North American session. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% higher to near 97.20.
In the policy meeting, the Fed announced a pause in the monetary easing cycle and indicated that upcoming policy meetings will be data-dependent.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.
