At the Asian trading session the NZD fell on report that RBNZ will present a new assessment of the economic situation in New Zealand on July 21. Market participants considered that assessment of RBNZ can give ground to lower interest rates in New Zealand due to the changed financial conditions in the country because of the new developments in Europe after Brexit.
Interest rate in New Zealand is at the level of 2.25%, which is one of the highest level among advanced economies of the world. Since last June RBNZ has repeatedly cut interest rates. The rate was reduced from 3.5% to the current 2.25%. Last time the rate was reduced in March. However, after a short-term reduction, the New Zealand Dollar quickly regained position in the foreign exchange market and continued to grow. The pair NZD / USD has been the uptrend since September 2015.
Even collapse of the financial markets at the beginning of the year, which caused sharp decline in commodity prices, did not prevent quick recovery in the pair.
European developments of the past few days have encouraged investors’ interest to safe-haven currencies and to the currencies of the countries with high interest rates in the Pacific region.
High interest rate will not prevent the rise in housing prices in Australia and New Zealand.
However, expensive national currency can impede economic development in New Zealand, which is largely based on exports. Agricultural and timber industry are the major sectors of the New Zealand’s economy.
In March, Central Bank of New Zealand lowered key rate to the current level of 2.25%. In the following up comments the Bank expressed concerns about further deterioration of the global economic outlook and decline in inflation expectations in New Zealand. Actually, inflation expectations in New Zealand have dropped and the prospects for the world economy have deteriorated, particularly due to Brexit.
If trade-weighted exchange rate of the NZD remains high, the RBNZ will have to significantly downgrade forecasts of inflation and GDP. In this situation, the RBNZ will be forced to lower the official interest rate. A meeting devoted to this issue is scheduled for August 10.