The Australian dollar has hit a 10-year low against the US dollar, after New Zealand’s central bank surprisingly cut interest rates by half a per cent — a move which no economist forecast.
While 18 out of 21 economists surveyed by Reuters forecast an interest rate cut, they all expected a 25-basis-point move. Three others expected no change.
The Reserve Bank of New Zealand’s official cash rate target is now 1 per cent — the same as Australia’s, after the Reserve Bank left local rates on hold yesterday.
The surprise super-sized rate cut across the Tasman had flow-on effects for the Australian dollar, which slumped as much as a cent against the greenback, hitting a 10-year low of 66.77 US cents at 1:19pm (AEST) before recovering slightly to 66.98 an hour later.
This is the lowest level for the Australian dollar against the greenback since March 2009, when the economic fallout from the global financial crisis reached its zenith.
CommSec’s chief economist Craig James said the lower dollar would come as a relief for the Reserve Bank of Australia and other economic policymakers, even if it may be a headache for Australians travelling overseas.
“The weaker Aussie will increase the attractiveness of Australian goods on the global stage and against imported products,” he wrote in a note.
Rabobank’s Michael Every saw the RBNZ move as part of the global trade and currency wars, saying “the gloves truly came off” with the bigger-than-expected rate cut.
“Not only that, we got [RBNZ] governor [Adrian] Orr basically promising to do whatever it takes: more rates cuts, negative rates, QE [quantitative easing] — you name it. There will be no keeping the powder dry,” Mr Every wrote.
“As a result NZD plummeted below 0.64 [US dollars] like a Kiwi trying to fly; and AUD fell to a decade low below 0.67 like a wombat trying to fly — which is a great analogy for the RBA actually.”
The New Zealand dollar fell much further than the Australian dollar, losing about 1 per cent against the weaker Aussie dollar.
‘Should we be worried too?’
The reason the Australian dollar fell along with its trans-Tasman counterpart is investors now expect the RBA to follow suit, as it did with rate cuts earlier this year.
“If you want to get ahead of the curve then the RBNZ does this better than most, and is not one to mess around,” Pepperstone’s head of research Chris Weston wrote in a note.
“One questions if this is a message that they are genuinely worried and, if so, should we be too?”
However, if the RBNZ is “genuinely worried” its post-meeting statement gave little indication.
In fact, if one did not know that it had just cut rates by half a percentage point, someone reading the statement would have thought the RBNZ had left rates on hold.
“Employment is around its maximum sustainable level, while inflation remains within our target range but below the 2 per cent mid-point,” the statement noted.
“Recent data recording improved employment and wage growth is welcome.”
It was not just current economic conditions that the RBNZ talked up, but also the medium-term outlook.
“In New Zealand, low interest rates and increased government spending will support a pick-up in demand over the coming year,” the statement continued.
“Business investment is expected to rise given low interest rates and some ongoing capacity constraints. Increased construction activity also contributes to the pick-up in demand.”
The surprise over-sized interest rate cut seems to be an insurance policy against growth slowing, rather than a response to events that have already taken place.
“GDP growth has slowed over the past year and growth headwinds are rising,” the statement said.
“In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.”
As a small, open, free market, trade-reliant economy — quite a bit like Australia’s — New Zealand’s central bankers are particularly concerned about the escalation in the trade war.
“The members noted that heightened global uncertainty was reducing investment and suppressing trading-partner growth,” they warned.
“This highlighted the risk of a larger or more prolonged slowdown in global economic growth.”
So, the RBNZ has doubled up on its rate cut now in order to, it hopes, head off steeper rate cuts later on.
Unlike the RBA announcing two small rate cuts in June and July, then a pause this month with the strong hint of further rate cuts if needed, the RBNZ has effectively said to hell with it.
“The members debated the relative benefits of reducing the OCR [overnight cash rate] by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now,” the meeting record noted.
“They agreed that the larger initial monetary stimulus would best ensure the committee continues to meet its inflation and employment objectives.”
JP Morgan’s Ben Jarman said the RBNZ may also be trying to pre-emptively offset the upward effect on interest rates likely to flow from its tougher bank capital requirements — intended to make banks safer and more able to absorb losses — which will be finalised later this year.
“Senior officials have given no quarter in their ambition to sharply raise bank capital requirements (among other reforms), which will likely flow through to mortgage rates,” he wrote.
“But there are political constraints in acknowledging this, so one other likely motivation for moving more aggressively now is to use the scapegoat of global interest rates moves, and create some separation from the finalisation of bank capital reforms in 4Q.”