This morning, the Kiwi dollar (NZD/USD), and the Kiwi in general, depreciated after the Reserve Bank of New Zealand (RBNZ) held rates steady, as expected. While this had been priced in, recent good economic news out of New Zealand has helped build interest rate hike expectations. In focus, the unemployment rate fell to 4.9 percent in the first quarter. Secondly, CPI reached 2.2 percent annually in the fourth quarter of 2016.
After the policy announcement, RBNZ officials noted the increase in headline inflation was mainly due to higher tradable inflation. In particular with petrol and food prices. The RBNZ views this as only temporary and that it may lead to some fluctuation during the remainder of 2017. However, the central bank maintains its longer-term view is that inflation will be anchored around two percent.
The Kiwi Dollar reacts to Dovish Comments
The post policy announcement is what sent the Kiwi dollar lower, as seen by the gap down in the above MT 4 chart. The RBNZ stuck to its previous track record that monetary policy will remain accommodative for a considerable period. However, they removed any comments that international outlook as one of their reasons for uncertainty remaining. In the last monetary policy statement, it was mentioned as a source of concern.
The central bank said that their forecast for the average official cash rate will rise in the third quarter of 2019. The markets were hoping this would happen sooner than this, and by 2018. As a result, front end government bond yields sunk fast as any hopes for a rate hike, in the near future, was cut from forecasts.