FXStreet reports that economists at Rabobank note the Reserve Bank of New Zealand (RBNZ) took a steady interest rate decision overnight but it was the optimistic tone of the accompanying statement which took the market by surprise.

“The December unemployment rate unexpectedly dropped to 4%, Q4 headline CPI at 1.9% y/y was a little faster than expected and house price inflation picked up into the end of last year. The better data can be linked with the 75 bps in rate cuts announced by the RBNZ last year in addition to the government’s increase in fiscal spending.”   

“The RBNZ indicated that any coronavirus impact would likely be short-lived. The result was a sharp drop in expectations regarding further interest rate cuts from the RBNZ and a spike higher in the value of the NZD/USD. In our view, however, the NZD is not out of the woods yet.”

“The RBNZ forecasts that economic growth will accelerate over the second half of 2020 on the back of both monetary and fiscal stimulus.”

“The RBNZ policy look set to remain on hold. However, if evidence mounts that the impact from coronavirus is set to be significant, the RBNZ will likely be forced to react. We see risk of AUD/NZD heading lower towards the psychologically important 1.03 level.”