RBNZ cuts rates by 0.25%, as expected

As was widely expected by a majority of traders and analysts alike, the RBNZ cut the interest rates by 0.25%. There was a very small chance that it might have gone for more tightening and cut the rates by 0.5% but that did not come to fruition.

This was released in a statement by the Reserve Bank Governor Graeme Wheeler and a copy of the statement can be seen here .

This was the sixth cut in the interest rate in the past 14 months. It is clear that the bank is not very comfortable with the high exchange rate of the Kiwi Dollar and this cut was aimed at reducing the exchange rate. The bank also signalled further cuts in the near future. Though the RBNZ has cut rates several times over the last few months, NZ continues to have higher interest rates than most of the countries of the developed world and coupled with the fact that NZ offers stability in terms of finance and economy, investors have continued to push the NZ dollar higher and higher in recent months giving a lot of headache for RBNZ.

Proving true to the fact that the market doesn’t always react the way many expect it to, the Kiwi dollar shot up after the news was released as can be seen in the M1 chart below:

This was because many traders were hoping for a further cut to 0.5% and this cut proved to be a disappointment for them. It also proved that the NZ dollar continues to be attractive even at this interest rate level. This further adds to the headache of the RBNZ who would now be lost on how to weaken the Kiwi dollar. One choice would be to continue these cuts in the near future and this is what the markets expect going forward. Wheeler has also promised to keep watching the FX markets over the next few days and observe the reaction though he didn’t comment explicitly on FX intervention, as yet. Unlike other banks, he believes that RBNZ still has little more ammunition left to control the exchange rate of the Kiwi dollar. Most of the developed countries have very low interest rates, many 0% or close to 0%, and they do not have much room to do anything else to control their currency rates.

In other Asia-Pacific news, South Korea has kept its interest rates on hold, similar to India yesterday. The markets have been quiet so far and they are range-bound for now. Expect action to pick up once Frankfurt opens.

For more detailed analysis from the author, please visit NoaFX