RBNZ Deputy Governor Karen Silk said in an interview on Friday that New Zealand’s central bank is taking a measured approach to interest rate cuts.
Important quotes
There remains uncertainty about how quickly inflation will decline.
The bank is taking a measured approach to interest rate cuts.
The development of price inflation is crucial for the future development of the cash interest rate.
Market reaction
At the time of writing, the NZD/USD pair is trading 0.13% lower on the day, trading at 0.5983.
RBNZ Frequently Asked Questions
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are to achieve and maintain price stability – which is achieved when inflation, as measured by the Consumer Price Index (CPI), is between 1% and 3% – and to promote maximum sustainable employment.
The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) sets the appropriate value of the Official Cash Rate (OCR) according to its objectives. When inflation is above the target, the bank tries to contain it by raising its policy rate. This makes it more expensive for households and businesses to borrow money and thus cools the economy. Higher interest rates are generally positive for the New Zealand dollar (NZD) as they lead to higher returns and make the country more attractive to investors. On the contrary, lower interest rates tend to weaken the NZD.
Employment is important to the Reserve Bank of New Zealand (RBNZ) because a tight labour market can fuel inflation. The RBNZ’s objective of “maximum sustainable employment” is defined as the highest use of labour resources that can be sustained over a sustained period without causing inflation to accelerate. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise at an ever faster rate, forcing the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can use a monetary policy tool called quantitative easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions, with the goal of increasing the domestic money supply and stimulating economic activity. QE usually results in a weaker New Zealand dollar (NZD). QE is a last resort when the central bank’s objectives are unlikely to be achieved by simply lowering interest rates. The RBNZ has used it during the Covid-19 pandemic.
