New Zealand rate cut odds recede following Orr's speech

Summary:

• NZ dollar leads the gains among major currencies this morning
• Adrian Orr seems to rule out the RBNZ would need to resort to unconventional monetary policy tools sometime in the future
• Rate cut odds retreated noticeably over the past week

A day after the Reserve Bank of New Zealand meeting, when rates were left unchanged, its Governor Adrian Orr gave a speech being hawkish enough to see the kiwi climbing. First of all, Orr underlined that the central bank was pleased with the outcome of the latest 50bps rate reduction in August. He noticed that interest rates declined across the board since then, as retail banks passed lower lending rates to many businesses and consumers. At the same time, the exchange rate also eased, and the cumulative impact of the easier monetary conditions was now working through the economy. According to him, interest rates will remain low for a long time and the country should take advantage of this favourable environment. Finally Orr suggested that the country is in a sound position to both seize the opportunities and manage the challenges associated with the global low interest rate environment. Indeed, New Zealand had its budget perfectly balanced at the end of 2018, allowing the country to take on new debt. In response to his comments the market-based probability of further monetary easing over the next year has retreated and consequently the NZ dollar has strengthened.

Rate cut expectations have receded all along the curve, as measured by swap rates on the overnight rate in New Zealand. Source: Bloomberg