RBNZ wants weaker New Zealand dollar to reach inflation target

In the upcoming meeting of the Reserve Bank of New Zealand, the central bank would be undertaking its rate decision. The central bank is expected to maintain a close watch on the U.S. Fed, which would be making its rate decision three hours before the RBNZ. The New Zealand central bank is still hoping that the USD strength and the Fed rate hikes these would cause might do some of the RBNZ’s easing work for it, noted Commerzbank in a research note.

From the New Zealand’s view point, stronger New Zealand dollar continues to be the key issue for reaching the inflation target. However, despite the two rate cuts, the currency strengthened continuously in 2016 as the hesitant approach of the U.S. Fed exerted pressure on the USD. Indeed, the next Fed rate hike might alleviate the pressure on the currency front.

However, the New Zealand central bank cannot wait until then. If the RBNZ does not cut its rates in the upcoming meeting, the FX market is expected to see this as giving up, at least momentarily, to NZD appreciation. This might make way for a stronger New Zealand dollar.

But the longer the New Zealand dollar rises or continues to be strong, the more this exerts pressure on the outlook. The central bank should undertake an action today if it intends to stay away from being pushed into a scenario where it tries to avert the worst with the help of FX market intervention, according to Commerzbank.