RBNZ: Negative rates not to be a deathblow for the kiwi – ANZ

At its last meeting, the Reserve Bank of New Zealand raised the prospect of moving to negative rates. Economists at ANZ Bank think they will become a reality by April 2021. For the NZD, this is not likely to drive a major depreciation. The RBNZ is however likely to succeed in anchoring the NZD domestic narratives, rather than the whims of global liquidity and risk appetite. This will have the most impact on the AUD/NZD cross, with the AUD still likely to trade higher in an environment of growing central bank balance sheets.

More – RBNZ: Negative interest rates by April 2021 – ANZ

Key quotes

“We forecast that the RBNZ will cut rates into negative territory in the early part of 2021. While this may dampen some enthusiasm for the NZD, it’s not necessarily a game-changer. A wholesale and rapid decline in the NZD is unlikely. Rather, we think the depreciation in the NZD that would result from a move below zero would be similar to what would happen if the RBNZ cut rates from say 0.75% to 0.25%.

“For NZD/USD, it is important to remember that negative rates will not entirely change the NZD’s spots. It will remain a cyclical currency tethered to a small open economy which is highly geared to the global trade cycle and that still has to fund its current account deficit. The most likely outlook for the NZD is that a decline in rates would drag fair value a touch lower, but more critically it provides the RBNZ a chance to ensure that the NZD does not appreciate with the tide of global liquidity. As such, it has a chance to stay at a level that supports New Zealand’s economic health.”

“For the AUD/NZD cross, this will widen the policy gap forming between the RBA and the RBNZ. Even though we expect the RBA will ultimately add more explicit asset purchasing to its arsenal, rate spreads between Australia and New Zealand will be wider than they were. This will provide a bit more room for AUD/NZD to appreciate. A simple extrapolation of our relative interest rate forecasts shows that a break above 1.10 on a sustained basis is increasingly likely. If, through 2021, the NZD becomes less sensitive to global liquidity dynamics in an environment of expanding global balance sheets, then we may see AUD/NZD pushing above 1.15 on nonfundamental drivers.”