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Domino Principle set to topple interest rates – smaller central banks move lower together

  • New Zealand central bank posts surprise 50 basis points interest rate cut
  • Other central banks in the Asia-Pacific region also cut rates
  • These actions build pressure on the US Fed
  • Analysts calculate an increased likelihood of a US rate cut

The Reserve Bank of New Zealand (RBNZ) announced on Weds 7th August a cut in base interest rates of 50 basis points. The scale of the move and posting of a new record low level of 1% caught the markets off-guard.

Source: Reuters

Analysts and traders had been expecting a 25 basis point cut from the RBNZ and the super-sized loosening of monetary policy left many wondering if the bank’s officers knew something they didn’t.

One risk to the policy makers is that overshooting with cuts and then subsequently implementing raises will make them look like unprofessional flip-floppers – not a good look for a central bank. The willingness to cut early and cut hard therefore caused considerable alarm.



 The New Zealand approach contrasts with that of the Reserve Bank of Australia (RBA), which earlier in the week faced a similar situation. The RBA took the decision to under-react rather than over-react. Analysts looking to give more credence to the decision made by the bank with the larger economy would do well to consider that the RBA announced a 25 basis point cut at its last meeting. That the RBA was reported to be considering cutting to record low levels, so soon after its last meeting, gives an indication of which way the markets think rates are heading.


India and Thailand – both make cuts

The increasing risk of a protracted trade war between the US and China would have been high on the agenda when central bankers of India and Thailand convened this week. Both central banks cut interest rates, giving credence to the argument that measures – even pre-emptive ones – are needed to keep their respective economies growing. The Reserve Bank of India trimmed 35 basis points off its base rate and has now cut interest rates by a cumulative 110 basis points this year. Thai officials also had to consider the strengthening Thai baht and risk that this would impact the competitiveness of Thai exports in the international markets. The Bank of Thailand cut rates for the first time since 2015 with the base rate now at 1.5%.


Philippines and Indonesia – up next

Economist Rajiv Biswas was reported in the South China Morning Press as saying that the Philippines, South Korea, Australia and Indonesia are all showing signs of a ‘dovish bias’ as the global economy slows to a crawl due to the trade tensions. He said:

“The Philippine central bank is expected to announce a fresh rate cut on Thursday.”

 Source: South China Morning Post

Indonesia’s deputy central bank governor Destry Damayanti gave dovish guidance when she said on Wednesday 7th August that she expected easing measures to “last quite long because we need stimulus for our future economic growth.” (Source: Bloomberg)


All together now

All in all, analysts then can match the interest rate cuts with plausible justifications. All are finding a little more wriggle room on rates following the fall in oil prices, which reduces some of the inflationary pressure their countries feel from price moves in that particular commodity.

The Kiwi move, being a 50 bp cut, would cause alarm even on a stand-alone basis but the greater significance of the moves comes from the central bank decisions coming as a group. The majority of these economies were through the earlier part of 2019 making hawkish noises on monetary policy but now a pattern is forming of concerted movement in the other direction and it’s adding to pressure on the US Federal Reserve to in turn cut rates.


Kiwi – the centre of attention

Of all the moves, the super aggressive cut by the RBNZ catches the eye. Unemployment there is low and the double cut takes rates there to record low levels. The move from rates being 1.5% to 1.0% is significant enough, but comments from central bank governor, Adrian Orr, took things to another level. Speaking at a news conference he said:

 “It is easily within the realms of possibility that we might have to do negative interest rates. Today's cut reduces the risk of having to use negative interest rates… Probably the single biggest challenge to us is just how low global nominal interest rates are.”

 Source: FXStreet

Source: ForexLive (Photo AP)

NZDUSD – Five day

Source: TradingView

NZDUSD – Three months

Source: TradingView

The RBNZ move was inspired by domestic issues, particularly household debt levels. It has however brought the Kiwi currency pair to the centre stage of the global Forex markets, which can make smaller currencies vulnerable to international capital flows. The rate has caused a drop in value but RBNZ will be pleased strength was found at those lower levels – the consensus from analysts possibly being that the move will bolster the NZ economy in the medium and long term.


Final Thoughts

Taken together, the smaller economies can play a large part in shaping the policy of central bankers from much larger countries. The reaction from the market is country-specific and the ‘Kiwi’ NZDUSD currency pair tanked on news of the rate cut. It hit lows of $0.6378 – levels not seen for three and a half years.

The European Central Bank and Reserve bank of Australia appear to be taking their lead from the US Federal Reserve. The smaller Asian-Pacific Rim countries have taken pre-emptive measures to insulate against any prospective US rate cuts – but by all posting cuts in quick succession, they may have made US cuts more likely.

Governor Orr of RBNZ might sound alarmist to suggest NZ rates could go negative, but he’s simply flagging up that once the dominoes start falling, it’s hard to know quite where and when they will topple.