New Zealand's central bank stuns markets with 50-bp rate cut

Reserve Bank Governor Adrian Orr

Australian dollar slumps to 10-year low after New Zealand central bank rate cut

With the RBNZ purchasing premium tickets on the global monetary easing bandwagon and signalling further cuts, the New Zealand Dollar is positioned to weaken further. The measure spiked to 15.62% which is the fourth highest reading of the year and more than double its average over the last 12 months.

The cut of half a percentage point by the Reserve Bank was a surprise, with most economists forecasting a rate cut of 0.25%.

However, he added the hefty 50 basis-point cut, which caught markets off-guard, reduced the possibility of having to use negative interest rates as it would stimulate the economy.

The New Zealand dollar fell by about 2% on the news and was trading at around 64 US cents.

The Kiwi currency plunged to its lowest level since early 2016.

Policy makers in India, New Zealand and Thailand moved aggressively to shore up growth and stoke inflation, all cutting interest rates by more than investors had expected.

Investors ramp up GBP/EUR parity betsSterling was similarly range bound against the U.S. dollar yesterday, with no economic or Brexit news for investors to digest.

That said, the Committee didn't sound fully confident that this would actually eventuate: "The members discussed that if sentiment remained low, perhaps due to global economic conditions or if profitability remains squeezed, growth might not increase as anticipated over the medium term".

New Zealand's central bank cut its official cash rate 50 basis points to a record low of 1 per cent.

Orr said U.S. -China trade tensions have lingered for too long, creating global economic uncertainty. On Tuesday, the Reserve Bank of Australia held rates steady at 1 percent but left the door open for more cuts.

With the RBNZ's Governor keep holding his bearish bias towards future monetary policy, the NZD/USD pair refrains from further recovery while trading near 0.6445 at the start of Thursday's Asian session.

"We see another cut in November to 1%, and there could well be further cuts beyond that", said Nick Tuffley, chief economist at ASB Bank in Auckland. "That will encourage thoughts that other central banks, such as the ECB (European Central Bank), will not hang around when they next meet", ING analysts said. Those fears were underscored after Washington labelled China a currency manipulator in a dramatic escalation of the trade dispute between the world's biggest economies.

"A cash rate of 1% for an economy with an 11-year low in unemployment, rising wages and expansionary fiscal policy may remove any downside risk from our 2020 growth forecast", said Williamson.

"We still expect the dollar to rise to 7.35 yuan by the end of the year, which will make the USA administration very uncomfortable".

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