The Reserve Bank of New Zealand cut its key rate from 3.50% to 3.25% last night. A glance at the NZD-USD exchange rate which had previously been at 0.72 and is now keeping just above 0.70 illustrates that it caught a number of market participants unawares with this step.
However, the step did not come as a complete surprise. Commerzbank mentions, the reasons for and against a rate cut were more or less balanced.
In the end the RBNZ was of the view that the downside risks for inflation dominated due to the weakening demand and it preferred not to dither and to take action right away. For the time being NZD is likely to remain under pressure, not least as RBNZ governor Graeme Wheeler already signalled a further rate cut, albeit with the usual caveat: of course the step would depend on the incoming data, says Commerzbank. That means the market will keep a close eye on the economic data until the next meeting.
However, in the end the development of NZD is also decisive. A renewed appreciation of the kiwi dollar would no doubt be sufficient reason to cut rates again. Only last night this step proved to be a suitable tool to reach this aim.
