RBNZ’s Conway sees economic slack shaping response to oil shock
Reserve Bank of New Zealand Chief Economist Paul Conway said that the central bank sees lingering slack in the economy that will shape how aggressively it responds to the inflationary aftershocks of higher oil prices, Bloomberg reported on Wednesday.
Key quotes
We think there is still excess capacity in the economy, so the output gap is still negative. You see that across a bunch of indicators, including unemployment at 5.3%.
Will run its ruler over all of that and figure out what that context means for the extent of those second-round inflationary effects of the oil shock.
That’ll determine how hard we have to lean against that, in terms of potential OCR hikes going forward.
The markets do their thing and then every seven weeks or so, the Monetary Policy Committee does our thing and sometimes they line up and that’s great and sometimes they don’t and we can surprise the market.
Market reaction
At the press time, the NZD/USD pair is down 0.15% on the day to trade at 0.5827.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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