Pound Sterling New Zealand Dollar Exchange Rate Forecast Slumps after Unexpected RBNZ Interest Rate Cut

March 10, 2016 - Written by Toni Johnson

STORY LINK Pound Sterling New Zealand Dollar Exchange Rate Forecast Slumps after Unexpected RBNZ Interest Rate Cut

RBNZ Surprised Markets by Cutting the Overnight Cash Rate

The most significant currency news overnight came from New Zealand where the Reserve Bank of New Zealand (RBNZ) caught investors on the back foot by trimming its key lending rate by 25 basis points, despite forecasts that they would leave it on hold.

The cut sent the RBNZ’s Official Cash Rate to a fresh record low of 2.25% and support for the Kiwi Dollar (currency : NZD) slumped as a result.

The Pound Sterling New Zealand Dollar exchange rate was holding steadfastly below the 2.1000 GBP NZD threshold in the lead up to last night’s announcement, but investors’ reaction to the shock move was instant, sending the pair 2.1424 in the hours immediately after the decision.

Expectations of Further Cuts Weigh on NZD Demand

The big worry now for market participants holding Kiwi Dollars is that this may not be a one-off move, with speculation that further cuts could follow. RBNZ Governor Graeme Wheeler added fuel to these concerns in his accompanying statement which saw Wheeler strike a decidedly downbeat tone regarding the prospects for his local currency.

The RBNZ Chief noted that, ‘the main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.’

Wheeler went on to assert that, ‘while long-run inflation expectations are well-anchored at 2 percent, there has been a material decline in a range of inflation expectations measures. This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes.’

He rounded things up by stating that, ‘headline inflation is expected to move higher over 2016, but take longer to reach the target range. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.’

If the Pound Kiwi Dollar exchange rate now trends higher, then analysts forecast that the pair has the potential to track higher towards the 2.2239 GBP NZD level.

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