The 411 on the RBNZ Interest Rate Decision

Earlier today, all eyes and ears were focused on the Reserve Bank of New Zealand (RBNZ) as announced its interest rate decision.

Although the official cash rate was expected to remain unchanged at 2.50%, analysts still paid close attention to the bank’s statement. For the most part, market junkies were curious to see hear the RBNZ’s take on monetary policy after its neighbors from across the Tasman Sea, the Reserve Bank of Australia (RBA), recently cut interest rates.

What happened

As expected, RBNZ Governor Alan Bollard didn’t announce any rate cut or hike. In fact, he hinted that as the European debt crisis continues to unfold, the central bank would keep rates at low levels all throughout 2012.

The main takeaway from the statement is that the RBNZ is worried. Much like everyone else, it seems that central bankers are waiting for the Greek elections to be concluded before they make a move.

But it’s not just Europe’s debt problems that RBNZ officials are worried about.

On the domestic front, the local economy has also shown signs of weakness. Bollard specifically cited lower commodity prices to weigh down on export incomes and consequently on economic activity as well.

Taking into consideration how falling commodity prices could potentially restrain profits, the RBNZ also downwardly revised its forecasts for economic growth for the next two years. GDP for March 2012 to March 2013 is now eyed to come in at 2% after being previously estimated at 3.1%. Meanwhile, GDP growth for March 2014 is anticipated at 3%, down from 3.7%.

Price Action

NZD/USD Chart

NZD/USD was actually on its way down south at the end of the New York session, but it soon rallied upon the release of the decision. The lack of any specific language that the RBNZ would be cutting rates any time soon gave Kiwi bulls reason to let out a sigh of relief, allowing NZD/USD to bounce off a rising trend line.

Looking ahead

Take a minute to look at the recent moves by other central banks around the world.

The European Central Bank (ECB) seems to be more open to easing down the road. The People’s Bank of China (PBoC) surprised the markets with a rate cut late last week. As mentioned above, the RBA has cut its baseline rates a couple of times this year already. And of course, how can anyone ignore the prospect of QE3 from the Federal Reserve?

Seeing as how other central banks are being more receptive to looser monetary policies in order to stimulate growth, don’t be surprised if we see the RBNZ follow suit.

Just take note that Bollard’s term is coming to an end but he has no plans to extend his term. This means that come October, we will have a new RBNZ Governor. Bollard may decide to keep rates on hold until then to give the incoming Governor more flexibility and options with regards to choosing the appropriate interest rate level.

We could be in for a couple of wacky months ahead, so make sure you tune in regularly for the latest updates on central bank actions and other economic developments!

  • Shug

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