AUSSIE DOLLAR SINKS TO DECADE LOW
THE Australian dollar has slumped to a decade low – falling below the “flash crash” nadir it hit earlier this year – after New Zealand’s central bank raised the spectre of negative rates.
Speaking after the Reserve Bank of New Zealand dramatically cut that nation’s cash rate yesterday, governor Adrian Orr said negative rates were “easily within the realms of possibility”.
The central bank stunned the market, slashing its cash rate by 0.5 percentage points.
As the decision reverberated through markets, the Aussie dollar took another nosedive, continuing the steep descent it started late last month.
It tumbled through the US67.41C level it had touched in January, then spiralled below US67C for the first time since early 2009, during the depths of the global financial crisis.
Over 80 minutes from about noon, the Aussie fell 1.5 per cent against the greenback – a sharp slide relative to typical foreign exchange movements – losing US1.05C. It was buying US66.77C at its trough yesterday.
New Zealand’s cash rate now stands at 1 per cent, which is on par with the cash rate here after Australia’s Reserve Bank cut that rate by 0.25 percentage points in June and again last month.
Mr Orr said central bankers had decided it was better to do “more sooner” than to be reactive in their efforts to fight unemployment and keep inflation at a sustainable level.
“Holding an interest rate (cut) back in case you need it … more in the future just makes no sense whatsoever,” he said at a press conference.
“Without doubt globally, when you’re looking at Europe, Sweden, Japan, all with negative interest rates, and with us at 1 per cent and many other economies below 1 per cent, it’s easily within the realms of possibility that we might have to use negative interest rates.”
Central banks that cut their benchmark rates below zero effectively charge commercial banks to hold their cash – an attempt to strongarm them into instead lending it out.
Mr Orr argued the move to cut New Zealand’s cash rate to 1 per cent actually reduced the likelihood it would ultimately have to resort to negative rates.
“The important thing to remember today is that … doing more sooner probably reduces the probability,” he said. “That means we’re using our tools effectively.”
Capital Economics analyst Ben Udy said that despite the dramatic rate cut, it was unlikely the New Zealand central bank was “done” and another cut was likely in February.
While the RBA left its cash rate on hold this week, economists broadly expect another rate cut by the end of the year.