- NZD/JPY plummets around 150 pips intraday in reaction to the RBNZ’s surprise 25 bps rate cut.
- RBNZ Governor Adrian Orr noted that we are going back into a period of low and stable inflation.
- A positive risk tone undermines the safe-haven JPY, albeit does little to lend support to the cross.
The NZD/JPY cross retreats sharply from a nearly two-week high touched during the Asian session on Wednesday and dives to the 88.00 mark after the Reserve Bank of New Zealand (RBNZ) announced its policy decision.
The RBNZ board members decided to cut the Official Cash Rate (OCR) for the first time in over 4 years, by 25 basis points (bps) to 5.25%. This surprise move defies economists’ expectations and comes almost a year ahead of the central bank’s projections. In the accompanying policy statement, the central bank forecasted more cuts over the coming months, citing the recent progress towards meeting the annual inflation target and weak domestic economic growth. This, in turn, is seen weighing heavily on the New Zealand Dollar (NZD) and exerting downward pressure on the NZD/JPY cross.
In the post-meeting press conference, RBNZ Governor Adrian Orr said that policymakers considered a range of moves and the consensus was for a 25 bps rate cut. Orr added that rates are not back at neutral in the forecast period as projections show that we are going back into a period of low and stable inflation. The comments did little to provide any respite to the NZD bulls, though a positive risk tone undermines the safe-haven Japanese Yen (JPY) and could lend some support to the NZD/JPY cross. That said, the lack of any meaningful buying supports prospects for a further depreciating move.
Investors now look forward to the release of the US consumer inflation figures, due later during the North American session, which could infuse volatility in the financial markets and influence the JPY demand. This, in turn, could provide some impetus to the NZD/JPY cross and produce short-term trading opportunities.
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.
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