RBNZ Rate Cut: First of Many to Come?

Boy does RBNZ Governor Alan Bollard know how to pull off a surprise! Almost every one saw a rate cut coming from the RBNZ with most traders bracing for a 25 basis point cut. But sha-bam! In its first rate cut since April 2009, the central bank brought the official cash rate down to 2.50% from 3.00.

Although it caught most traders off guard, I think the RBNZ’s bold move to stimulate growth is well-accounted for. According to the RBNZ’s head honcho, economic growth was already weak even before the Christchurch earthquake and pointed out that the calamity only reversed the frail signs of recovery that we saw early on in the year.

With those dovish statements coming from the RBNZ’s big man himself, it’s no wonder that currency bears attacked like the Kiwi was the biggest salmon in the market!

NZD/USD plunged to an intraday low of .7327 upon the release of the report, hitting the pair’s lowest level in five months. Since that’s already a whopping 5.6% drop since the start of the year, markets are now crowning the Kiwi as the worst-performing G10 currency. Ack! That’s like getting a “no” from American Idol judge Jennifer Lopez!

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Wait, haven’t the traders been pricing in a rate cut since last week when New Zealand‘s Prime Minister John Key and Finance Minister Bill English were broadcasting dovish statements left and right? Then why did the Kiwi fall so sharply?

Although traders had already had an inkling of a rate cut, I’m betting my neighbor’s cat that not everybody thought that the central bank would slash rates by twice as much as the 0.25% consensus. The bigger-than-expected cut in interest rates signaled that the central bank is more worried about the economy’s growth than markets presumed, and this weighed heavily on the Kiwi at the release of the report.

While many are starting to worry that this rate cut is the first of many to come, Bollard mentioned that future monetary policy changes will depend on upcoming economic data.

It’s tough to tell for now, if this should be reassuring. I guess we’ll all just have to wait and see whether New Zealand’s fourth quarter GDP will tank or not. As I’ve discussed in one of my past articles about the possibility of New Zealand plunging back to recession, the recent commodity price rally might not be enough to prevent their economy from contracting. If their actual GDP comes in deep in the red, the central bank might be forced to cut rates one more time!

But that doesn’t mean that New Zealand won’t have a chance to bounce back. The RBNZ predicts that they’ll be back to their rate-hiking ways next year, as reconstruction efforts in Christchurch could contribute to overall growth. Think of all the additional hiring and spending that rebuilding would require! In fact, when the central bank officials did their number-crunching, they estimated that economic growth would peak at 6% by 2013.

I’m keeping my fingers crossed that New Zealand could make a strong rebound soon, in the same way that I’m praying that the victims of the Christchurch quake could soon recover. Hopefully the central banks efforts could help them survive that setback and turn it into a comeback.