NZDUSD climbed higher after RBNZ left the OCR unchanged at 1.5%, a well-anticipated move. The members maintained a dovish tone, but not more dovish than in the previous meeting. Although the central bank indicated that interest rates might need to be lower, it does not sound like it would come very soon. This appears different from other major central banks which intentionally signaled a easier monetary policy in the near future. That said, the market continues to expect a 80% change of a rate cut in August.

The key reference in the policy statement is “a lower OCR may be needed over time” in the first paragraph. The reference was reiterated in the closing paragraph, adding that the measure is a response to the “downside risks around the employment and inflation outlook”.

The members remained concerned about the global economic uncertainty, noting weakening outlook and intensifying downside risks to trade. The believed global slowdown has been affecting “New Zealand through a range of trade, financial, and confidence channels”.

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Domestically, RBNZ acknowledged that growth has “slowed over the past year”. The members cautioned that “softer house prices and subdued business sentiment” have dampened household spending. They noted that “inflation remains slightly below the mid-point of the inflation target” while “employment is broadly at its maximum sustainable level”. Like Australia, New Zealand has been struggling with sluggish wage growth despite low unemployment. This in turns substantiate weak inflation. As noted in the statement, some members suggested that the lack of wage pressure might indicate that there is still “spare capacity in the labour market”. Others noted that “reduced migrant inflows could see wage pressure increase in some sectors”.

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