The Reserve Bank of New Zealand (RBNZ) surprised markets this morning by not only cutting interest rates by 25 basis points, but also reporting that a 50 basis point cut was under serious discussion. The RBNZ justified the move by saying that the economy had cooled more than expected recently and that it was basing its assessment of inflation more on expectations, which had already returned to the middle of the target range of 1-3%, Commerzbank FX strategist Volkmar Baur notes.

RBNZ decision to support the Kiwi in the medium term

“Inflation itself is still too high, but also on the right track. The central bank compared the situation of a weaker economy and falling inflation with other G10 countries, saying that New Zealand was more comparable to countries that had already started to cut interest rates.”

“As noted yesterday, the market had been expecting a cut, while analysts generally tended to believe that the central bank would wait. What surprised the market so much that the Kiwi lost about 1% against the US dollar this morning is that the central bank seems to be seriously considering a 50 basis point move. However, it appears to me that this statement is more about telling the market that anything is possible at any time.”