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Further Easing from the Reserve Bank of New Zealand

Posted: Thursday, August 13th, 2020

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The New Zealand Dollar (NZD) traded with an offered tone after the Reserve Bank of New Zealand eased the monetary policy. The central bank expanded its quantitative easing program to $100 billion, in response to the challenges posed by the COVID-19 crisis.

The health crisis is on every central bank’s agenda. For the first time in history, all countries entered an economic recession at the same time. Therefore, the central banks responded with the same measures. Namely, rates slashed to zero and quantitative easing programs.

Reserve Bank of New Zealand

Reserve Bank of New Zealand Keeps a Dovish Outlook

Despite setting the monetary policy for a relatively small economy, the Reserve Bank of New Zealand is not a shy central bank. Decades ago, it pioneered inflation targeting – quickly adopted by other central banks in the developed world.

By expanding the Large Scale Asset Purchase (LSAP) program, the central bank signals its readiness to do more. Although New Zealand’s economy was more resilient than its peers, the bank remains vigilant, monitoring all economic sectors.

Like any developed country, New Zealand’s economic growth depends a lot on international trade. Therefore, what happens with the global economy plays a crucial role locally. However, the rise in commodity prices created by the crisis helped the economy offsetting the stronger NZD exchange rate.

Key Points in the August 2020 Statement

First, the central bank recognized the resilience of New Zealand’s economy. This is a country that handled the health crisis in an outstanding way, quickly becoming the world’s envy. Therefore, the economic recovery is closer to a V-shape in many sectors.

Second, the Reserve Bank of New Zealand recognized the importance of the fiscal stimulus still in place. The Wage Subsidy supports a lot of workers as job losses are likely to continue.

Third, the easing further reduces the interest rates, thus supporting households and businesses. The GDP contraction, while significant, was followed by a strong bounce, fueling hopes of a quicker recovery than expected.

Finally, the central bank did not ignore the Kiwi dollar. The recent strength from the March lows followed as the U.S. dollar declined across the board. Because the easing programs run by the Fed in the United States are bigger than the ones run by the Reserve Bank of New Zealand, the American dollar decline more than its New Zealand counterpart.

Summing up, the central bank delivered on its promises. It expanded the LSAP program and stands ready to further ease, if necessary. As for the NZD, it recovered the losses triggered by the announcement, as the risk-on sentiment dominates financial markets.

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