After the 9/11 terrorist attacks in the United States in 2001, the Reserve Bank of New Zealand cut short-term interest rates by 50 basis points (half of a percentage point)
in anticipation of a hit to global growth (and weaker inflation). At the time, the move was considered a very dramatic move, even bold.
But times have changed. What was once considered remarkable is now considered run of the mill, or even conservative.
So when the RBNZ today cut the Official Cash Rate by 50 basis points, and said it expects perhaps a couple of 25-basis-point-cuts over the next few months, taking the OCR to maybe 2.5 per cent, we didn't see FX traders dump the Kiwi dollar, but the reverse: Active NZD-buying as financial markets which pushed the NZD up by well over half a U.S. cent to US 0.5130.
It is real indicator of how seriously weak the RBNZ judges the global economy to be (including our big trading partners in Japan, China and the rest of Asia) and how stressed international credit markets are in the wake of the meltdown in the U.S. and European banking systems.
The RB's Monetary Policy Statement has also seen the kiwi rise on the cross rate against the Australian dollar, up by as much as 1 percent, the highest for the NZD/AUD currency pair since March 2. http://www.bloomberg.com/apps/news?pid=20601081&sid=aUWDuip1D8TA&refer=australia
Exporters will be hoping for the market to reverse the rise in the NZD/AUD in coming days and weeks.
After all, the New Zealand economy has been weaker than Australia's for over a year now. Japanese, European and North American investors looking for safe and relatively high interest rates (real or inflation-adjusted deposit interest rates are very negative in America, Britain and Japan) should be buying up Australian currency over and above Kiwi currency and FX traders should note that Dr Bollard today did an unusual thing today.
Dr Bollard lowered NZ's Official Cash Rate (3%) to be below Australia's (3.25%).
When the OCR was introduced to N.Z. in March 1999 it was set at 4.50% (below Australia's 4.75% at the time). Both countries' rates sat at 5% by the end of 1999, but for almost all of the time since the start of the new century N.Z. short term interest rates have been higher than Australia's, sometimes considerably so (e.g. in July 2007 the OCR was 8.25% in NZ and 6.25% in Australia. NZ rates stayed at 8.25% right through until 23 July 2008, whereas Australia's rates were much lower over the period, having peaked a full percentage point lower, at 7.25%).
Hopefully for our exporters, we'll see the NZD fall against the AUD in the weeks ahead on these interst rate differentials - that would give exporters a boost on their returns for exporting to the Lucky Country. Its our exporters' turn to enjoy the unusal situation of NZ having lower short-term interest rates than across the ditch!
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