No Changes From The Reserve Bank Of New Zealand

The Reserve Bank of New Zealand (RBNZ) issued its monetary policy statement today. It decided to continue the quantitative easing program (known as LSAP – Large Scale Asset Purchase Programme) and to keep the official cash rate at 0.25%. 

New Zealand has been viewed as one of the few places in the world where the pandemic was controlled with relative success. It led by example, showing other developed countries that it can be done.

However, recently the COVID-19 infections required regional lockdowns, especially in Auckland, with major repercussions on the economic activity. As such, the RBNZ keeps its monetary policy accommodative, and it is likely to do so for as long as needed until the economy gets back on its feet.

Inflation and Employment Outlook Remains Subdued

The RBNZ considers both employment and inflation when setting the monetary policy. In other words, to fulfill its mandate, the central bank needs to see notable improvements in both areas before acting. So far, both are below pre-pandemic levels, and the outlook remains bleak.

The New Zealand economy is a special one. Known as having more sheep than the number of people inhabiting the islands, New Zealand is one of the biggest exporters of dairy products to China and sheep products to the Middle East (e.g., meat).

Its proximity to Australia makes its currency, the New Zealand Dollar (NZD), moving in a tight correlation with the Australian dollar. In fact, the cross pair, the AUDNZD, is one of the pairs that hovers around parity for several years now, rarely exceeding 10% above or below the level before the market to autocorrect.

The NZD moved lower in anticipation of today’s RBNZ decision. Since the trading week started two days ago, the NZDUSD dropped from 0.68 to 0.66, but one can easily put the correction on the back of the risk-off move seen in the U.S. stock market. The USD’s bounce across the board explains such sharp moves ahead of a central bank decision.

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