A few new cases of Covid-19 were enough for New Zealand to put a lockdown across the country, which in turn caused the Reserve Bank of New Zealand to postpone its decision to raise interest rates. Given the high market disappointment, the New Zealand dollar remained fairly stable.
The Reserve Bank of New Zealand (RBNZ) kept its official interest rate (OCR) at a record low of 0.25 percent at its August meeting. The market was expecting a 25 basis point hike. These plans were thwarted by restrictions put in place due to the emergence of new cases of Covid-19 on the island.
Will the hike come with a delay?
The bank's board noted that inflationary pressures will be accentuated by rising capacity pressures, higher oil prices and transportation costs, and supply shortages. Consumer price inflation is expected to rise above its target in the near term before returning to an average of 2 percent by mid-2022. Today's RBNZ decision follows the recent suspension of additional bond purchases under the large-scale asset purchase program in July.
However, the topic of a New Zealand rate hike has not been resolved, but merely postponed until the coronavirus situation stabilizes. Bank policymakers still expect a rate hike before the end of the year to anchor inflation expectations and contribute to maximum sustainable employment. A hike could have a positive impact on the New Zealand dollar.
USD index rises on delta fears
On the broad currency market the Dollar Index strengthened strongly, surpassing the 93 point level, which could translate into a fall of EUR/USD to the vicinity of 1.1700. Investors appeared to be buy USD out of fear that a rapid growth in coronavirus delta mutation infections could hinder the global recovery. On top of that, US retail sales data disappointed - it was lower than expected, but industrial production rose for the fifth consecutive month.
Investors can now look forward to the Federal Reserve's stance on the tapering schedule written into the FOMC minutes, which will be released tonight.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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