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The Flow-on Effects of New Zealand’s Interest Rate Cuts

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RBNZ cut Kiwi rates

You might have heard a lot of chatter regarding the New Zealand Reserve Bank’s decision to cut interest rates in New Zealand. This obviously has an impact on the economy, but sometimes it can be difficult to cut through the financial talk to get a clear picture. Here’s our take on what happened and what it means for the future.

What actually happened?

On June 11 2015, the Reserve Bank of New Zealand announced that it was reducing the Official Cash Rate (OCR) by 25 basis points, making the current rate 3.25 percent. This had an immediate impact on the New Zealand Dollar as seen on the chart below.

The Flow-on Effects of New Zealand's Interest Rate Cuts
The Flow-on Effects of New Zealand’s Interest Rate Cuts


The official statement cited a fall in export commodity prices, particularly in the dairy industry, as a key indicator of the necessity of the move. Alongside this, they stated that there was an expected weakening in demand for these commodities. They also made mention of a currently overvalued exchange rate.

As a whole, the Reserve Bank of New Zealand made the cut in the hope of steering the economy toward a more sustainable position.

What could this mean for New Zealand’s economy?

Since the cuts, the New Zealand dollar has experience an overall downward slide in value, as expected.
Low interest rates and a declining New Zealand dollar can lead to New Zealand’s exports being cheaper and its imports more expensive in their domestic market. Generally speaking, cheaper exports can lead to an increase in production, helping to create jobs.
It will also likely be cheaper for New Zealand residents to borrow money while reducing the incentive for them to save. This will give people more incentive to spend and help support their domestic Market.
Low interest rates can also mean lower mortgage repayments on variable rate loans, if banks pass on the cuts. This gives households more discretionary income, causing a rise in consumer spending.
Asset prices can also be expected to rise – as lower interest rates make borrowing money cheaper and affordable to a greater number of people, the demand for assets like property grows, driving the price up. The Reserve Bank of New Zealand has anticipated this flow-on effect, and believe that new loan-to-value measures combined with the tax initiatives planned by the government will help address this issue in the coming months.

What does this mean for the Forex trader?

A weaker New Zealand Dollar means more opportunities for traders to capitalise. The potential for a high yield may lure investors to seriously consider New Zealand shares as well as getting involved in currency trading. Of course, any moves should be carefully considered – the New Zealand Reserve Bank concluded their official statement by hinting toward more cuts in the near future, possibly cementing their position in this round of currency wars.
In short, it might be a great time to get into Forex trading in New Zealand – economies tend to cycle, and a great opportunity to take advantage of the strong trending market as its happening.

If you are feeling inspired to try your hand at currency trading but you’re feeling unsure about where to start, make sure you register for a free Forex workshop in New Zealand or Australia. Learn to Trade offers a thorough course that will get you started.
What’s your take on the cuts to New Zealand’s interest rates? Do you think the New Zealand dollar will continue along the current trend of devaluation? Share your thoughts in the comments below.

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