The Reserve Bank of New Zealand Reduced the Official Cash Rate to 2%

new zealand

The Reserve Bank of New Zealand cut the cash rate to 2% in August from 2.25% the previous month, as forecasted by economists. New Zealand is facing declining prices of milk. In order to stimulate the domestic economy and raise the value of the national currency, the largest exporter in the world cut the key policy rate, for the third time this year, by 0.25% to 2.75%.

In relation to the latest reduction in the benchmark interest rate, the Governor of Central Bank announced the possibility of re-reduction soon. Given the situation, a new reduction is more likely to happen. Dairy comprises a quarter of New Zealand’s total exports. The embargo imposed by Russia on imports of milk, and the slowdown of economic growth among oil producing countries, caused the Chinese demand to decline. This, in turn, affected the prices of milk, causing it to fall.

On the other hand, the offer dairy products is steadily growing, particularly in Europe, after the abolition of quotas in April this year, which led to increased productions. States, whose economy is based on exports of raw materials, are under pressure as a result of declining prices, primarily due to the slowdown in the Chinese economy, a major consumer of these products.

In the table below, you can see the history of cut rates for a better understanding of the trend.

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The Central Bank of New Zealand announced that the global economic growth is slowing, as the world markets remain uncertain about China. The reduction by 0.25% in July was already the third reduction in the benchmark interest rate of New Zealand. Its economy further suffered a dent by the falling prices of milk and dairy products in the world market.

Since February 2014, prices of dairy products already shrank by 50%. Exports of milk and dairy products accounted for 30% of gross domestic product (GDP) of New Zealand. The faltering prices of dairy products greatly affected dairies in this country, which are unable to hire a new labor force, or invest further in production. This year, in particular, is difficult for a New Zealand company – Fonterra, the largest dairy exporter in the world.

The rate cut was already priced into the exchange rate. The market was looking for signs of more easing later this year, but no specific date was mentioned by RBNZ. This news is NZD positive. The rate cut was already priced by the market. The Reserve Bank of New Zealand already signified the need for further easing. The Reserve Bank wants the dollar at a lower level. Subsequently, traders havealready started placing orders before the projected rate reduction is implemented. Should the rate is not cut, further appreciation of the NZD would more likely to continue.

With these developments, NZD/USD rose to 0.7345 from 0.71830. The currency pair NZD/USD rose by almost 155 pips, but consolidated at 0.7265.  The Governor of the Reserve Bank of New Zealand said that they are targeting of keeping inflation within 1% – 3%, on a medium term. Consumer Price Inflation rose 0.4% in June, on an annual level.

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The price of crude oil stabilized after reaching a two-week maximum. The number of active oil wells in the United States continues to increase. But, it has minimal effect on oil prices. There were speculations that several manufacturers have agreed to limit or decrease oil production, thereby affecting the price. According to some sources, a new meeting could come as early as this autumn, somewhere in Algeria. A surplus in market supply, plus a denial by Russia to restrict this arrangement, saved the higher growth rates.

Inventories of crude oil in the US increased for the past two consecutive weeks, based on the weekly report. The report showed an increase of 1.4 million barrels, beating experts’ forecasts at negative 1.6%. However, gasoline inventories fell by 3.3 million barrels as a result of the active season. Price of crude oil soared more than 3%, going back to $40 per barrel level. The price of crude oil increased during the European trading, following the release of a report published by OPEC indicating that the cartel projected an increase in demand for oil by the end of 2016.

The American Petroleum Institute yesterday released a report on inventories in the previous week. It showed a growth of 2.09 million barrels. Today in the afternoon, its report was published in the stock market, and in the US government. According to the data from OPEC, Saudi Arabia in July increased its production to a record 10.67 million barrels a day. During the European trading, price of crude oil soared 0.56%.

The dollar fell against many currencies, reducing the possibility that the Fed will raise interest rates later this year as the economy may not accelerate as predicted. US Federal budget recorded a deficit of $112.8 billion in July; a better outcome versus than the consensus estimate of $119 billion.

Meanwhile, forex pair EUR/USD rose to 1.1186. Official data showed that the number of mortgage applications in the US increased last week by 7.1%, after falling 3.5% in the previous week. The US currency fell against Japan’s yen, British pound, and Swiss franc. USD/JPY fell to 101.05, while GBP/USD climbed to 1.3072. Likewise, USD/CHF and USD/CAD fell to 0.9756 and 1.3008, respectively, while AUD/USD and NZD/USD advanced to 0.7751 and 0.7258, respectively. The dollar index rose by 0.01% to 96.23.

Summary

The import/export sectors in New Zealand continue to put pressure on the New Zealand Dollar. The currency is further affected by the low global inflation that caused mixed reactions on the trading floor. This should make the Central Bank of New Zealand to continue with the monetary easing.