The Reserve Bank of New Zealand (RBNZ) recently took markets by surprise with a 50 basis point rate hike. This unexpected move caused the NZD/USD exchange rate to jump more than 1.0%, but it quickly halved its gains afterward. The RBNZ’s decision was made in response to rising inflationary pressures, however, economic data suggests that further tightening may not be necessary and that cuts are now much more likely.
Recent GDP figures showed a 0.6% contraction for Q1 2021 and consumer spending has been weak due to the ongoing pandemic restrictions, which have weighed on sentiment across many sectors of the economy, such as hospitality and travel-related industries, leading to job losses throughout New Zealand’s workforce during this period as well. In addition, global commodity prices remain subdued while demand remains low meaning exports are unlikely to provide any significant boost in growth over the near term either making further monetary easing from RBNZ increasingly probable going forward.
Overall, although there is still some uncertainty surrounding future policy decisions from RBNZ, it appears at this stage that they will be looking towards cutting rates rather than raising them again anytime soon given current economic conditions.
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