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The Reserve Bank of New Zealand left the interest rate unchanged at 2.25% and softened the wording about the strength of the kiwi. This in turn led to further strength of the kiwi, with NZD/USD shooting much higher to 0.7140.

Is this move real? It seems that the weakness of the US dollar (thanks to a the terrible NFP among other things) contributes to the move. Here are opinions from two banks:

Here is their view, courtesy of eFXnews:

RBNZ: Opening The Way For A Cut In August Meeting – Nomura

As expected, the RBNZ kept its policy rate unchanged at 2.25% and maintained its dovish policy bias,  stating that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.

Today’s decision suggests that the central bank is currently more concerned about the financial stability risks than the weakness in inflation. Moreover, it continues to suggest that the RBNZ is likely to cut rates in the near future because of the weakness in inflation. In addition, since there are some expectations that a weakening of the NZD would help inflation return to target, further strength in the currency would raise the likelihood of further rate cuts.

With all this in mind, we think it looks very likely that the RBNZ will cut rates this year, depending on inflation, house prices and exchange rate developments, but  the RBNZ would rather wait to have the Q2 CPI report (to be released on 17 July) before taking a decision, opening the door to a cut at the 11 August meeting.

RBNZ Playing A Game Of NZD Chicken; Fade Initial Knee-Jerk Reaction – ANZ