New Zealand Dollar Takes A Hit After Reports That RBNZ Is Considering An Uncommon Monetary Policy Strategy
The New Zealand dollar turned bearish on Tuesday following reports that the Reserve Bank of New Zealand (RBNZ) plans to try out an uncommon strategy in a bid to stimulate the economy through monetary policy.
The New Zealand dollar’s decline on Tuesday after the announcement about the unconventional monetary strategy by the RBNZ highlights investor response over the matter. Testing the market through a monetary strategy that is not commonly used creates a sense of uncertainty for investors, thus causing them to shy off from the New Zealand dollar/Kiwi.
The New Zealand dollar’s performance relative to the US dollar
The bearish performance of the NZD means that the US dollar gained an edge against it, and this was evident by the bearish trend in the currency pair's performance. The currency pair hit a high of 0.6787 on Monday this week but then dropped to a low of 0.6691 on Wednesday.
The RBNZ has been relatively silent about matters related to the planned unconventional monetary policy action in a bid to avoid adverse reactions by investors.
The bank is committed to improving New Zealand’s economic interests. It slashed its benchmark interest rate in May to 1.5%, and market analysts believe that it will trim the rate further to about 1.25% in August. These measures are in response to the slowing economic growth in the country and lukewarm inflation.
“The announcement shows that the New Zealand economy is no longer immune to unconventional policy,” stated ANZ exchange rate strategist Sandeep Parekh.
Some economists believe that the cash rate will reach the 1% mark by the end of 2019. Meanwhile, analysts also believe that the RBNZ's decision to try out unconventional policies will help ease the pressure on the New Zealand dollar. The country's treasury department has also been on the lookout for measures of handling or preventing a crisis in case the traditional methods fail to work or yield expected results.
RBNZ’s strategy for the policy changes
The treasury presented a paper to Grant Robertson, New Zealand’s Finance Minister, through which the paper highlighted three potential measures that the bank might implement.
Among those measures is adjusting the OCR to levels below the zero mark. This means that banks would end up footing the bill for holding funds, thus encouraging them to lend.
The RBNZ is however keen not to drop the rate below zero by more than 35 basis points. Treasury believes that if that were to happen, then it would create an incentive to hoard physical cash contrary to the central bank’s goal of making sure that there is money circulating in the economy.
There are, however, concerns that such measures might not achieve the expected results, especially in a massively bearish market.
The central bank would have to use targeted fiscal policy alongside the uncommon practices to make sure that it steers the economy in the right direction. RBNZ has a program that is aimed at enhancing its readiness for such a situation.