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All Eyes on the RBNZ Decision This Week

June 22, 2020 By Mircea Vasiu

On Tuesday, the Reserve Bank of New Zealand (RBNZ) is expected to announce its official cash rate decision and to release the monetary policy statement. Usually, such an event is interesting only for NZD traders – only this time, it may be different. 

NIRP in New Zealand?

The RBNZ is one of the most innovative central banks in the world. Despite its relatively small role in the world’s international financial scene, the RBNZ is the first central bank that introduced inflation-targeting, a policy followed now by all important banks in the world (e.g., European Central Bank, Bank of England).

In other words, the RBNZ is not shy in taking bold steps. Such a time may have come now.

The official cash rate in New Zealand is at extreme lows. It sits at 0.25, the lowest level in decades. Yet, the NZD is not as weak as the RBNZ likes to – in fact, it strengthened about five percent since the RBNZ announced its last monetary and economic projection.

What makes this week’s RBNZ important is the possibility of negative interest rates to be introduced. Already with the rate level at the extreme low, RBNZ was not shy in letting the world know that it thinks of implementing a negative interest rate policy.

If that is the case, it will further fuel discussions about similar policies in other, more important central bank jurisdictions, like Bank of England and even the Fed. Most recently, the Fed discounted the possibility of negative interest rates in America, but with another central bank going down that road, the experiment will be closely watched and, perhaps, copied.

If any central bank aims to weaken its currency, negative interest rates could work. For instance, since it lowered the deposit facility below the zero level, the ECB saw the Euro falling to almost parity against the USD.

The NZD is almost unchanged against the USD since the start of 2020. After the initial rush to buy USDs as the pandemic spread, the markets turned around risk-on prevailed.

The NZDUSD pair did a round trip, rising from a low of 0.55 during March to over 0.65 in June – all this while the RBNZ keeps the official cash rate close to zero.

If the RBNZ sees inflation expectations de-anchoring, it may be the push needed to announce negative interest rates – a crucial development for the New Zealand Dollar.