August 07, 2019 | AtoZ Markets - The New Zealand Dollar or Kiwi was tumbled during early trading on Wednesday as investors responded to a Reserve Bank of New Zealand (RBNZ) interest rate cut. The rate cut was more than the investor's expectations and guidance for the future that was more dovish than predicted.
RBNZ cuts its interest rate by 50 basis points to a new record low of 1.25 percent, taking the market to surprise and forced traders to dump the Kiwi currency.
The rate cut was of high importance because it followed second-quarter employment data. The statistics show that the Kiwi jobless rate falling to 11 years low and wages beginning to rise. This event might have an inflation pressure the RBNZ is attempting to provoke.
This was the first rate cut since May which aims to support inflation and might bring weakening in global economic activity and ongoing trade tensions. Some of the policymakers even signaled that further rate cuts could be even possible. As per the data, interest Rate in NZ averaged 7.26% from 1985 until 2019, reaching an all-time high of 67.32% in March of 1985 and a record low of 1% in August of 2019.
Is NZ interest rate cut sign of rate cut war?
After the unexpected rate cut, Global economic activity continues to weaken, easing demand for New Zealand’s goods and services. The heightened uncertainty and declining international trade have contributed to lower trading-partner growth. However, Central banks are easing monetary policy to support their economies.
In addition to that, global long-term interest rates have declined sharply to historically low levels which is consistent with low expected inflation and growth rates for the future.
Policymakers everywhere have been forced to be more responsive for the fears that grow over the fallout of the US-China trade dispute on the global economy. Also, last week, the US Fed Reserve cut rates for the first time in a decade, whilst the RBA eased in both June and July.
Also, markets are wagering the European Central Bank (ECB) and Bank of Japan (BoJ) will have to follow or risk their currencies rising to uncompetitive marks.
Moreover, New Zealand and Australia, who came through the global financial crisis without having to resort to unconventional policy. Both the countries are now finding themselves for an economic slowdown with borrowing costs at record lows. Last month, Australian bank cuts its benchmark to 1% and market experts see further reductions in both economies as domestic demand loosens. The trade tensions between the US and China threaten to limit exports and commodity prices.
Chinese yuan devaluation may trigger further global rate cuts
China’s central bank set its daily currency reference rate marginally stronger than 7 per dollar. The Wednesday level of 6.9996 gives the People’s Bank of China (PBC) a chance if it wants to track the spot rate lower whilst staying on the strong side of 7. The Yuan has recently breached that key psychological level after getting criticism from President Donald Trump and terrible global markets.
By letting the Chinese Yuan move lower, Beijing is sending an unmistakable signal. It is prepared to deploy its currency as a weapon in the trade war with the US and globally.
Julian Evans-Pritchard, senior China economist at Capital Economics has quoted that: "The fact that they have now stopped defending 7 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US."
A weaker currency can increase exports and will make imports more expensive. This could lead to inflation and can hurt spending. The higher prices might force the central bank to hike interest rates and hitting economic growth.
This pattern could spread in global markets and other countries might face the outcomes. Devaluation of currency also causes volatility and uncertainty into financial markets, since it causes the value of assets from property to stocks to fall.
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