The AUD has and is still experiencing downward pressure against the NZD. One of the reasons why the NZD is staying on historical high levels is because the Interest Rates or Cash Rate is being continually hiked. However, as a consequence of these actions from the Reserve Bank of New Zealand (RBNZ) the Consumer Price Index (CPI) in New Zealand has fallen dramatically over the last 4 months.
The CPI figures account for a majority of overall inflation. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate. Last week investors found the NZ inflation rate at an all time low of 1.6%. Currently the RBNZ targets at least 1-3% Inflation Year on Year, and even though the current inflation rate remains within those targets, investors are beginning to think that the Governor of the RBNZ, Bryan Wheeler’s promises of an Interest rate of 4% by the end of the year is unobtainable and unrealistic.
The RBNZ is known for its transparency regarding monetary policy intentions; therefore the result is usually foreseen in advance. The decision aligns with the Reserve Bank of New Zealand’s monetary policy to spur or slow economic growth. The RBNZ maintains an inflationary target of 1-3 percent and will change rates to keep it within such a range, making rate decisions quite predictable. Interest Rate changes are significant nevertheless, affecting interest rates in consumer loans, mortgages, and bond rates. Increases or even expectations for rate increases tend to cause the New Zealand Dollar to appreciate, while rate decreases cause the currency to depreciate.
Expectations for the RBNZ rate decision this Thursday are for a rate hike to 3.5% from 3.25%. This should see a slight improvement in the rates. Most investors should already have the decision “Baked into the Cake”, however accompanying statements from Wheeler should have some affect on investors positions.