New Zealand dollar rallies as RBNZ disappoints uber-doves
By Wayne Cole
SYDNEY, Nov 27 (Reuters) -The New Zealand dollar popped higher on Wednesday after the central bank lowered interest rates for the third straight meeting, but the reduction was not as much as market doves had anticipated.
Its Australian counterpart also edged higher after a reading on core inflation at home proved firmer than many had expected, lessening the chance of any rate cuts soon.
The Reserve Bank of New Zealand chopped its cash rate by 50 basis points to 4.25%, marking 125 basis points of easing in just four months.
Economists had overwhelmingly tipped a half-point move this week, but markets had priced in around a 40% chance the RBNZ would slash rates by a super-sized 75 basis points. 0#NZDIRPR
As a result, the kiwi dollar bounced 0.7% to $0.5870 NZD=D3, and away from a 13-month trough of $0.5797 hit the previous session.
The RBNZ also projected additional rate cuts in the future, aiming for a floor near 3.0% by 2027. However, its forecast for March next year at 4.07% indicated that the central bank did not expect to reduce rates by another 50 basis points in its upcoming February meeting.
"While the Bank signalled that it is in two minds whether to cut rates by 50bp in February or reduce the pace of easing to a smaller 25bp cut, we expect the Bank to deliver another 50bp at its next meeting," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.
Markets were less certain, pricing in only a small chance of a 50-basis-point cut in February, at least for the time being.
Two-year swap rates NZDSM3NB2Y= firmed 6 basis points to 3.6550%, having slid 12 basis points last week as investors wagered on a more aggressive RBNZ easing. Yields on 10-year bonds NZ10YT=RR rose 4 basis points to 4.570%.
The Aussie dollar was a shade firmer at $0.6478 AUD=D3, having touched a four-month trough of $0.6434 on Tuesday as the U.S. dollar benefited from talk of tariffs. Support lies around $0.6400 and the August low of $0.6349.
It was restrained by a 0.7% drop against the kiwi AUDNZD= in the wake of the RBNZ news.
At home, data showed the monthly consumer price index for October held at an annual pace of 2.1%, under forecasts of 2.3%. The headline CPI has been massaged lower in part by government rebates on electricity bills, which are temporary.
Core inflation, however, is more elevated at 3.5% putting it some way above the Reserve Bank of Australia's (RBA) target band of 2-3% and an impediment to rate cuts.
The central bank has repeatedly stated that policy needs to stay restrictive until it is confident core inflation will slow to around 2.5% in a sustainable fashion.
This is why markets are pricing in only a 12% chance that the RBA will cut its 4.35% cash rate at its next meeting on Dec. 10, and just a 21% probability of a rate reduction in February. 0#AUDIRPR
Reporting by Wayne Cole; Editing by Sherry Jacob-Phillips
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