The only central bank that delivered its monetary policy this week, the Reserve Bank of New Zealand (RBNZ), further eased the monetary policy. Coincidence or not, the easing comes at a time when New Zealand registers new COVID-19 cases, after over a hundred days without a new infection.
The island nation is the world’s envy for how it handled the pandemic. In the developed economies, it is the only one that managed to crush the virus and declare a COVID-19 country for more than three months. This is one of the reasons why the local currency, the NZD, appreciated against its counterparts, especially against the USD. Naturally, to the dislike of the RBNZ.
More Quantitative Easing from the RBNZ
The RBNZ increased the Large Scale Asset Purchase (LSAP) program up to $100 billion with the aim to further lower the interest rates. Moreover, the RBNZ message is clear – it stands ready to provide further support if needed, with little or no intention to reverse course from the current monetary policy path.
Perhaps this is the best time to see how interconnected the world is/used to be. New Zealand, despite what many think of its economy, it is mainly a service-based economy. Over sixty percent of its GDP comes from the services sector, and it relies heavily on international trade.
Or, international trade is the one that suffered the most since the pandemic started. Therefore, the central bank stands ready to intervene should the global slowdown affect the local economy more than anticipated.
This week’s RBNZ statement also mentioned the strong NZD. It is no wonder because the central bank was not shy in expressing its concerns regarding a strong currency.
Let us not forget that this is one of the most proactive central banks in the world. It was the first one to introduce inflation targeting as a central bank’s mandate, a mandate quickly adopted by other developed economies around the world.
As mentioned at the start of this article, the NZD sold on the news. However, it recovered during the following day, as summer trading paved the road for correlated trades and tight ranges.
Despite the RBNZ easing, the size of it is peanuts when compared with what other central banks did. As such, the NZD remains tightly correlated with the AUD and the risk-on/risk-off environment.