Anyone who doubted RBNZ’s willingness to deliver on Wednesday was disabused of their skepticism. New Zealand cut rates by 50bps, surprising consensus which was looking for 25.
“GDP growth has slowed over the past year and growth headwinds are rising”, the central bank said in the statement, adding that “in the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets”. The bank described the larger-than-expected cut as a testament to their “ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level”.
Needless to say, this opened a trapdoor under the kiwi. 18 of 21 economists saw a 25bp cut, and the other 3 were looking for a hold, so this surprised everyone.
“This was not what the market was expecting at all, it’s a shock to many”, Kyle Rodda, an analyst in Melbourne, told Bloomberg.
The RBNZ also slashed its growth forecast to 2.7% in the year through March 2020 versus 3.2% previously. The inflation outlook was cut to 1.4% this year from 1.6%.
Yields plunged on the dovish surprise. Benchmark yields in New Zealand have fallen to record lows in 2019 amid the unstoppable global bond rally, and the move on Tuesday was particularly dramatic. 10-year yields plunged 17bps in the knee-jerk.
This will likely lead folks to quickly reassess the outlook for the RBA, which is presumably why the Aussie dove to a decade low, breaking below the January flash crash levels in the wake of the RBNZ move. “Algos were the few to sell the kiwi at a decent rate as it vaporized on the way down due to repricing, so funds shorted spot AUD as it is more liquid and the RBNZ move made the trade more certain”, Asia-based traders told Bloomberg.
Stocks in New Zealand jumped on the news.
In addition to being a move designed to try and stay ahead of the curve on inflation and inoculate against expected gale force headwinds to the global economy, this looks like a bid to avoid falling behind in the burgeoning global currency war. Happily for Philip Lowe and the RBA, the Aussie went along for the ride.