High-Stakes BoE Rate Decision Triggers GBP/NZD Rally

October 30, 2017 - Written by James Fuller

STORY LINK High-Stakes BoE Rate Decision Triggers GBP/NZD Rally

During the previous week, the Pound saw a rise of over a cent against the New Zealand Dollar, from Monday’s opening rate of 1.8979 to close higher at 1.9091 on Friday.

This was not the best weekly rate, however, as on Wednesday the GBP/NZD pairing rose to 1.9314.

GBP NZD Exchange Rate Surges as Traders Price in BoE Rate Hike

The Pound has been lifted by trader optimism today, as all eyes turn to the Bank of England (BoE).

A growing number of economists believe that the BoE is poised to finally raise UK interest rates, having cut them all the way back in August 2016.

Not everyone has put their money on a rate hike, however. Peter Thorne of Charles Stanley remains sceptical;

‘Rock-bottom interest rates have been terrible for UK banks’ profitability, but any interest rate rise...could actually be a double-edged sword.

Higher interest rates will boost UK banks’ net interest income but the equity market is increasingly concerned about the slowdown in the UK economy and the negative effects it could have on loan growth and bad debt charges which a rate rise might worsen’.

New Zealand Dollar Tumbles as New Finance Minister Unveils Plans

The New Zealand Dollar’s massive drop today has come after news of policy changes from the new coalition government.

While it had been expected that the change of government might cause initial New Zealand Dollar volatility, the latest updates have shown that traders are still on edge.

Recent topics have been about changes to the Reserve Bank Act, among others. The Act is used to define the Reserve Bank of New Zealand’s (RBNZ) objectives.

If the new government’s changes are enacted, the act will see the RBNZ work to meet an employment percentage in the country, along with managing the NZD.

This hands-on approach to economic affairs might be seen as a breath of fresh air to some, but is clearly ruffling feathers elsewhere.

Other changes that have been unsettling traders have been announced by Grant Robertson, Finance Minister.

Mr Robertson has looked at increasing the minimum wage from NZ$15.75 to NZ$20 by 2021, which has sparked fears of companies being unable to adjust.

Robertson has defended his plans, stating;

‘When Labour was last in Government we were raising the minimum wage by about NZ$1 a year during that period, and we had some of the best economic growth and the lowest unemployment that we've seen.

Bear in mind, the people who will be getting these minimum wage increases will then be spending that money in the economy. It actually stimulates growth’.

More positively, Robertson has floated the idea of different tax rates for small businesses;

‘Australia has this - the idea of potentially a progressive tax rate for small businesses with low turnover. We want to take a look at that and see whether that could work in New Zealand’.

Closing on a concerning note, Robertson has added that the government plans to loosen the purse strings and spend, even if the economy is crashing;

‘I came into politics to make sure that we provided better opportunities for New Zealanders, that we protected our most vulnerable. There are certain areas of spending that we must do to be a decent society, to care for other people. I would never compromise on that’.

BoE Rate Decision Incoming, Pound Turbulence Highly Likely

UK data to watch out for this week will include a confidence measure early on Tuesday, as well as manufacturing, construction and services PMIs over Wednesday to Friday.

The actual outcomes of these readings might not have much effect on the Pound, as traders are more likely to be ‘blinkered’ to the BoE rate decision.

If the BoE hikes rates, the Pound could surge as this is not a guaranteed outcome. If traders are disappointed with another rate freeze, however, then a GBP/NZD crash could take place.

New Zealand’s next economic news will be Tuesday night’s unemployment rate result. Expectations are for a minor dip in the jobless rate, which might enable a brief NZD/GBP advance.

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TAGS: Pound New Zealand Dollar Forecasts