It’s been an interesting week for the Trans-Tasman central banks and the Aussie and Kiwi Dollars. While the Reserve Bank of Australia (RBA) opted to keep a steady hand and maintain interest rates at their current levels, the Reserve Bank of New Zealand (RBNZ) chose to cut.
RBNZ Attempts to get Ahead of the Slowdown
The RBNZ dropped the Official Cash Rate down to 1.5%, the same as Australia’s, a reduction of 25 basis points. The RBNZ hasn’t cut rates since November 2016, but stated that ‘a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit’.
Questions are now circulating the market as to whether the RBNZ will make another cut this year, with a potential opportunity around August. The Kiwi Dollar exchange rate dropped to six-month lows on the news.
Growth rates in both Australia and New Zealand have been falling. The RBNZ said:
‘Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly. Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.’
Factors to Influence AUD and NZD Exchange Rates
While markets will keep a close eye on monetary policy in both Trans-Tasman central banks, there are other factors which might influence the currencies. Commodity prices will be one factor, and global trade tensions will be another. With US President Donald Trump hiking tariffs on $200 billion of Chinese goods, markets wait to see how China retaliates and how talks continue.
Risk-off sentiment could cause the AUD and NZD exchange rates to remain lower, and if Chinese growth dims due to trade negotiations, this could impact both Australian and New Zealand economic growth too.