RBNZ set for another interest rate cut amid trade tariff uncertainty
- The Reserve Bank of New Zealand is set to lower the interest rate by 25 bps to 3.5% on Wednesday.
- In February, the RBNZ left the door open for further cuts, anticipating the negative impact of US tariffs.
- The New Zealand Dollar could experience intense volatility following the RBNZ's policy announcements.
The Reserve Bank of New Zealand (RBNZ) is on track to deliver a 25 basis point (bps) cut to the Official Cash Rate (OCR), bringing down the key policy rate from 3.75% to 3.50% following its April monetary policy meeting on Wednesday. The decision is fully priced in and will be announced at 02:00 GMT.
Therefore, the language in the RBNZ’s policy statement will be closely scrutinized for fresh insights on future rate cuts, which could significantly impact the performance of the New Zealand Dollar (NZD).
What to expect from the RBNZ interest rate decision?
The RBNZ has already cut by 175 basis points since August last year, with the former Governor Adrian Orr having left the door open for rate cuts in April and May while addressing his post-policy meeting press conference in February.
At its February meeting, the central bank said that “there is a risk of increased trade barriers and broader geoeconomic fragmentation,” adding that “an increase in trade restrictions is likely to reduce economic activity in New Zealand.”
Earlier this month, United States (US) President Donald Trump announced his long-awaited reciprocal tariffs, with China hit by additional 34% levies while New Zealand faces 10% tariffs. The Pacific Nation said it will not retaliate. China leads the US as New Zealand’s top export market.
Although the direct impact of US tariffs on New Zealand’s economy is likely to be limited, the tariffs will probably lower growth in the country's main trading partners, including Australia and China, eventually acting as a headwind to the South Pacific Island nation.
The gloomier outlook on global growth could prompt the bank to retain its easing bias, with markets now expecting the OCR to bottom out at 2.75%, compared to 3% a week ago.
How will the RBNZ interest rate decision impact the New Zealand Dollar?
The NZD/USD pair is recovering from five-year troughs near 0.5500 in the run-up to the RBNZ showdown.
The short-covering or profit-booking rally in the pair could gather steam following the RBNZ’s expected 25 bps rate decision.
The Kiwi Dollar could built on its recent recovery if the RBNZ warns of higher inflation due to tariffs, sounding cautious on the scope of future rate cuts.
However, amidst escalating US-China trade war and the associated risks to New Zealand’s economy, should the RBNZ surprise with a 50 bps rate cut, the New Zealand Dollar (NZD) will likely crumble against the US Dollar (USD).
“The NZD/USD pair remains exposed to downside risks as the 14-day Relative Strength Index (RSI) remains well below the 50 level, despite the latest uptick. If the downtrend resumes, the initial support is at the five-year low of 0.5506, below which the March 2020 low of 0.5470 will be targeted. If the selling pressure intensifies, the last line of defense for buyers is seen at the 0.5450 psychological level.”
Any recovery attempt in the pair will require acceptance above the critical confluence resistance around the 0.5700 region, where the 21-day Simple Moving Average (SMA), the 50-day SMA, and the 100-day SMA converge. Further up, the April 4 high of 0.5803 will be tested en route to the 200-day SMA at 0.5894,” Dhwani adds.
Economic Indicator
RBNZ Interest Rate Decision
The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.
Read more.Next release: Wed Apr 09, 2025 02:00
Frequency: Irregular
Consensus: 3.5%
Previous: 3.75%
Source: Reserve Bank of New Zealand
The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by Governor Adrian Orr’s press conference.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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