The New Zealand dollar (NZD) took a tumble against its US counterpart (USD) on Wednesday, dropping 1% after the Reserve Bank of New Zealand (RBNZ) surprised markets with a dovish shift in its monetary policy stance.
While the RBNZ opted to hold interest rates steady at 5.5%, as widely anticipated, its accompanying commentary and revised rate forecasts painted a picture of a central bank less concerned about inflation than previously indicated.
This shift in tone caught investors off guard, who had been pricing in the possibility of further rate hikes based on the RBNZ’s previous hawkish pronouncements. The absence of strong language about combating inflation in the latest statement, compared to the November meeting where the RBNZ warned of potentially needing to tighten further if inflation pressures rose, contributed to the market’s dovish interpretation.
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Furthermore, the RBNZ lowered its projected peak for the official cash rate (OCR) to 5.59% in June 2024, down from the earlier forecast of 5.67%. Although the central bank maintained its commitment to holding rates until June 2025, its revised projections for the OCR path beyond the peak differed slightly, indicating a potential for a slower pace of rate reductions compared to earlier expectations.
The NZD/USD currency pair reacted swiftly to the RBNZ’s dovish pivot, plummeting to as low as 0.6101 by 08:42 GMT.
