AUD/NZD jumps above 1.1050 as RBNZ leaves its cash rate on hold at 5.5%

AUD/NZD gains momentum around 1.1075 in Wednesday’s Asian session, up 0.63% on the day.
The RBNZ maintained the Official Cash Rate (OCR) unchanged at 5.50% at its July meeting on Wednesday, as widely expected.
The RBA’s hawkish stance lifts the Aussie against the Kiwi.

The AUD/NZD cross attracts some buyers near 1.1075 during the Asian trading hours on Wednesday. The cross gains momentum after the Reserve Bank of New Zealand (RBNZ) kept its cash rate unchanged in its July monetary policy meeting.

The New Zealand Dollar (NZD) edges lower as the RBNZ decided to keep the Official Cash Rate (OCR) steady at 5.50%, as widely expected by the markets. This marked the eighth consecutive meeting with no change in rates. According to the Minutes of the RBNZ interest rate meeting, the board notes a risk that domestically driven inflation could be more persistent in the near term. The central bank expected headline inflation to return to within the 1 to 3 % target range in the second half of this year. Meanwhile, New Zealand swaps imply 25 basis points (bps) of RBNZ rate cuts for October versus 16 bps before the RBNZ statement.

Elsewhere, the weaker Chinese economic data exerts some selling pressure on the China-proxy Kiwi. China’s Consumer Price Index (CPI) increased 0.2% YoY in June, compared to a rise of 0.3% in May, below the consensus of 0.4%. On a monthly basis, the CPI inflation arrived at -0.2% MoM in June versus the previous reading of a 0.1% decline, worse than the -0.1% expected.

On the Aussie front, the hawkish stance of the Reserve Bank of Australia (RBA) provides some support to the Australian Dollar (AUD). The recent hotter inflation data spurred the expectation that the RBA would raise a 25 bps rate in the September 24 meeting.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

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