New Zealand’s dollar plunged more than one US cent on Thursday after its central bank signalled an end to monetary tightening in the face of slowing growth and easing inflation around the world.
In early trade, the kiwi dropped to US73.21¢ from US74.42¢, before settling around US73.32¢. There was a corresponding freefall against the Australian dollar to A92.63¢ from A93.75¢, before a slight recovery to around A92.70¢.
The massive sell-off followed a decision by the Reserve Bank of New Zealand to hold the official cash rate unchanged at 3.5 per cent, while warning that the global outlook had deteriorated. Last year, the bank became the first in the industrialised world to tighten policy after the financial crisis, pushing the overnight rate higher by a full percentage point between March and July.
The RBNZ’s new caution follows a recent wave of monetary easing, including an interest rate cut in Canada last week, the European Central Bank’s €1.1 trillion ($1.4 trillion) bond-buying program and currency intervention by the Monetary Authority of Singapore on Wednesday.
All this is piling pressure on the Reserve Bank of Australia to cut the 2.5 per cent cash rate sooner rather than later, with economists now divided about whether it will ease as soon as its meeting next Tuesday, or in March, or later in the year.
The RBNZ said in a statement on Thursday morning that “trading partner growth in 2015 is expected to be similar to 2014, though the outlook is weaker than anticipated last year”.
“Divergences continue among regions, with growth in China, Japan and the euro area easing in recent quarters, while growth in the US has remained robust,” it said.
“World oil prices have fallen 60 per cent since June last year, which will boost spending power in oil importing economies but reduce incomes for oil exporters.
“The oil price decline, together with uncertainties around the transition of US monetary policy, has led to an increase in financial market volatility,” the bank said.
Like many central banks around the world, including the Reserve Bank of Australia, the RBNZ sees its currency as overvalued against those of its trading partners and competitors.
“While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals,” it said.
“We expect to see a further significant depreciation.”
TD Securities said in note that money markets were now starting to price in a cut in New Zealand’s official cash rate.
“On the recent low inflation print we already pushed out the next RBNZ hike from December into March 2016, although we remain far away from demanding a rate cut due to the plethora of data supporting above-trend GDP growth over the coming years,” the investment bank said.
“Nevertheless, we expect the markets to keep expectations live for a rate cut in the near term, keeping the New Zealand dollar and rates under pressure, and [Thursday’s] market reaction will be welcomed by the RBNZ.”