What a week it has been!
On Wednesday the Reserve Bank of New Zealand (RBNZ) cut its interest rates for the fifth time since June last year by 25 basis points to a record low of 2.25%. The reason for this surprise move was due to the global growth slowdown and weaker demand from China, one of their most important trade partners. New Zealand is the world’s largest dairy exporter, exporting 95% of its milk production.
The Bank also stated that it would cut rates further should there be need to do so. The last time that the RBNZ cut rates was in December as a result of a softening economy; however at the time Governor Graeme Wheeler was still positive about the outlook for inflation and economic growth for 2016. However, with the turn of the New Year, China’s economy weakened extensively which ultimately affected New Zealand.
Yesterday ECB President Mario Draghi shocked the financial markets by cutting interest rates to 0, expanding its quantitative easing programme (bond buying) and reducing the deposit rate further into negative territory in the hope of boosting the economy. All this was done in the hope of reviving the eurozone area and eventually attaining its inflation target of 2%. Draghi stated that interest rates would remain this low for a while due to slow growth and volatile financial markets.
The euro zone’s 19 countries are now seen posting average growth of 1.4 percent in 2016, rather than the 1.7 percent forecast in December. HICP inflation in the euro zone is now seen averaging 0.1 percent in 2016.
New euro zone growth forecasts:
- 2016: 1.4 percent
- 2017: 1.7 percent
- 2018: 1.8 percent
New inflation forecasts:
- 2016: 0.1 percent
- 2017: 1.3 percent
- 2018: 1.6 percent
So, what does a negative rate really mean? By introducing negative rates, the ECB essentially charges banks to deposit money which in turn has an impact on banks’ profits which ultimately affects the final consumers as profits will not be passed on.
Initially, traders sold euro across the board however when Draghi stated that interest rates could be at their bottom, euro was bought back against all currencies and seemed stronger than was first anticipated. However, in the coming days euro is still expected to weaken as yesterday’s meeting was anything but good news for the eurozone!