The New Zealand dollar jumped by almost 2 percent after the Reserve Bank of New Zealand (RBNZ) released its interest rates decision. As expected, the bank left interest rates unchanged at 1.75% and pointed that it could hold rates at this level until 2021. The bank said that the current expansionary policy will continue to support the economy.
However, while the bank sounded optimistic about the performance of the economy, it maintained that a key risk was that inflation was still sluggish. Inflation has been below the 2% target for a while now. The statement added that:
Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.
The interest rates decision comes a week after its neighbor Australia released its rates decision. In the statement, the RBNZ left interest rates unchanged and pointed that the rates could stay lower for longer. This lifted the Aussie for a while before the bank dovish stance led to a lower decline.
It also comes at a time when the New Zealand economy is going through a challenging period as evidenced by the recent data. Credit card speding in December shrank by 0.5% after climbing by 0.8% in November. On a YoY basis, the spending rose by 4.5%, which was lower than the expected 7.8%. The consumer confidence remains in the negative while the PMI numbers have been bearish. The services PMI for December was 53, lower than the previous 53.9 while the unemployment rate rose to 4.3%. On a positive note, the dairy trade index rose to 3264. This number is important because New Zealand is one of the largest dairy country in the world. The building permits for December rose by 5.30%, which was better than the expected decline of 1.50%.
It also comes at a time when the global economy is going through a challenging time. In recent months, leading global bodies like the IMF and World Bank have lowered the guidance for the global economy. The same is true with other central banks like the ECB and BOE.
After the monetary policy decision, the NZD/USD pair rose sharply to a high of 0.6850. This was the highest the pair had reached since February 8. In the chart below, this level was closer to the 28.6% Fibonacci Retracement level. It was also above the 21-day and 42-day EMAs. The pair could continue moving up, although a minor retracement to the 38.2% Fibonacci retracement level of 0.6800 could happen.