The NZD tumbled during the Asian trading session following the Reserve Bank’s announcement that NZ interest rates would remain on hold at 1.75%. Following the announcement, the NZD lost ground against a host of majors including the US Dollar, the Japanese Yen and the Australian Dollar, with losses ranging from 1.3-1.7% across the board.
The sell-off and depreciation of the NZD were triggered by weaker than estimated growth figures. Plus, the confirmation that rates would be held potentially until 2019.
Governor Graeme Wheeler justified the decision, stating that the upturn in consumable goods was due to ‘higher tradeable inflation, particularly petrol and food prices’.
Crucially, Wheeler does not believe that inflation will increase rapidly and whilst he acknowledged growth had been strong, he was aware of the limited growth in wages.
Inflation a Key Factor
Inflation was revised up in line with the annualised figure expected to reach 2.1% in 2018, with the RBNZ expecting 2018 inflation to slow to 1.1% in Q1, with estimates indicating it will remain within the 1-3% range.
What did Financial Markets Expect from the Announcement?
Many had anticipated the speech from governor Wheeler to have been much more upbeat following better than expected inflation levels in Q1. However, the RBNZ claimed that figures derived in March were due to momentary conditions.
Many perceive that the Reserve Bank are simply awaiting for the FED to react and raise rates and regardless of geopolitical pressure, many expect that to be when and not if.
How the NZD/USD Rate Reacted to the Announcement
Following the announcement, the NZD/USD rate tanked, falling from 0.6942 to 0.6855, immediately falling to an 11-month low.
The NZD/JPY reacted in a similar fashion to the NZD/USD dropping like a stone. Pre RBNZ announcement, the pair were trading around the 79.31 and currently the rate is around 78.04 with little support.
The AUD also benefited greatly with the NZD weakening from 0.9410 to 0.9310, depreciating a cent in just a few minutes, with the pair currently trading at around the 0.9295 mark.