New Zealand dollar rose by almost 1% against the US dollar after the Reserve Bank indicated that they would be careful with future reductions in interest rates. The pair NZD/USD was traded early this morning at a level of 0.7320, as the effect of the statements of some Fed members did not last long and the US dollar recorded losses against major currencies.
Reserve Bank still expected a further 35 basis points to be cut from interest rates, and dismissed claims it should either hold the rate at its all time low, or rapidly reduce it. Despite the willingness of the central bank to revive inflation in the country will not take hasty action.
“Rapid and ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market”, said Governor of the Reserve Bank of New Zealand, Graeme Wheeler. “It would use up much of the bank’s capacity to respond to the likely boom/bust situation that would follow and would place the Reserve Bank in a situation similar to many other central banks of having limited room to respond to future economic or financial shocks”, added he.
Further reductions in interest rates could lead to unsustainable growth and housing bubble in the country. Low levels of inflation in turn could bring down inflationary expectations and lead to an inflationary spiral that was the main reason for the bank to bring down interest rates this month.
The inflation target of New Zealand was still the most appropriate framework and the bank was “committed” to achieving the inflation goals.