NZD slides to four-month low as central bank hints at easing

The New Zealand dollar dropped to a four-month low against the US dollar today (January 28), after the country's central bank mulled future interest rate cuts to counter low inflation.

The kiwi traded at 0.6451 against the dollar at midday Hong Kong time – its weakest showing since early October, when it bounced back from levels not seen since the 2008 financial crisis.

The drop followed the Reserve Bank of New Zealand's (RBNZ) decision to maintain its benchmark interest rate at 2.5% amid hints of more monetary easing in the months to come.

"Monetary policy will continue to be accommodative," said RBNZ governor Graeme Wheeler in a statement, noting further easing "may be required over the coming year".

"A further depreciation in the exchange rate is appropriate, given the ongoing weakness in export prices," he added.

This is the very market reaction the RBNZ wanted. The NZD is adjusting [but] not as fast or as far as one would like
Cameron Bagrie and Philip Borkin, ANZ

"The door to easing has obviously been opened further, so markets will run with this theme," said ANZ's chief economist Cameron Bagrie and senior economist Philip Borkin in a note.

"This is the very market reaction the RBNZ wanted," they added. "The NZD is adjusting [but] not as fast or as far as one would like, perhaps."

"[Today's drop] is unlikely to be sustained unless the RBNZ cuts rates by more than the markets expect," said Paul Dales, chief Asia and New Zealand economist at Capital Economics in Sydney, in a note.

The central bank is battling below-target inflation, prompted by weak oil prices, a strong currency and rising immigration, which the RBNZ said last month has led to an increase in "spare capacity and unemployment".

Dairy prices down

Lower prices for dairy products, a major export, have added to the woes.

"The sharp fall in world dairy prices since 2014 has been a key driver of the reduction in GDP growth in the New Zealand economy and of the lower outlook for inflationary pressure," the central bank said in a policy report published in December.

"The RBNZ's hint that the weakening outlook for inflation means interest rates may have to be reduced this year, from the current rate of 2.5%, supports our long-held view that rates will fall to 2.0%," said Dales. "We suspect [the kiwi] will eventually fall from US$0.64 now to around US$0.60."

"The easing bias has been ‘stepped up', but the [central] bank stopped short of setting the scene for a March cut," said Bagrie and Borkin. "[The] short-term direction for NZD/USD is still dependent on the evolution of global risk sentiment."