Reserve Bank of New Zealand Confirms Pause in Interest Rate Normalization

September 10, 2014

New Zealand’s Official Cash Rate had been raised by 25 basis points each in March, April, June and July of this year, but the statement accompanying the last of these increases signaled that no more hikes would be undertaken before officials had ample time to assess the impact of the four tightenings already done.  Sure enough, officials left the Official Cash Rate at 3.5% and released a statement from Governor Wheeler that

  • Labels the kiwi’s present level “unjustified and unsustainable.”
  • Observes diminishing house price inflation, declining commodity export prices, subdued wage increases, low global inflation, well-anchored domestic inflation expectations, and overall a moderate level of inflation in New Zealand. 
  • Foresees a slower future rate of economic growth partly in response to the four aforementioned interest rate hikes.

Policy is paused, not at a turning point.  “we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.”

As for the kiwi, the statement includes harsh rhetoric protesting its failure to decline in tandem with receding commodity prices:  “We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalize.”  Can you just imagine the market reaction if as part of its reconfigured forward guidance at the next FOMC meeting, Fed officials were to write, “We expect a further significant and broadly based appreciation of the dollar, which should be reinforced as monetary policy begins to normalize during the first half of 2015?”


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