As expected by the market and most analysts, the Reserve Bank of New Zealand lowered its key interest rate once again this morning by 25 basis points to 2.25%. Since last summer, interest rate cuts have totalled 325 basis points, making the RBNZ the G10 central bank that has cut interest rates the most in this cycle, Commerzbank's FX analyst Volkmar Baur notes.

Press release signals neutral stance, market cheers

"However, the press release reads more like a text that could also justify an unchanged key interest rate. Risks are seen in inflation and the first signs of an economic recovery are identified. The labour market has already improved slightly and financial conditions have eased. After a weak second quarter, the economy returned to growth in the third quarter."

"As a result, the Kiwi even reacted to this morning's key interest rate cut with a slight gain. The market focused most on the change in the last sentence of the press release. In October, it still stated that the committee was open to further key interest rate cuts. This has now been reworded to a more neutral sentence stating that the next step will depend on the development of inflation and the economy."

"For the market, this signals an end to the interest rate cycle in New Zealand, which is why the market priced out another interest rate move in the coming year this morning, which yesterday was still considered a 50% chance. This also explains the reaction of the kiwi. Looking ahead, however, I expect inflation to be somewhat more persistent and growth to be somewhat weaker than the RBNZ currently expects. However, it will find it difficult to raise interest rates again soon, which is why the weak economy and low real interest rates will continue to weigh on the kiwi in the coming year."