Trump’s Liberation Day move depresses NZ wholesale interest rates, Kiwi dollar

Concerns about the Chinese economy are weighing on the NZ dollar. Art / Rod Emmerson

United States President Donald Trump’s “Liberation Day” tariffs have served to drive local interest rates and the New Zealand dollar lower.

Ongoing fallout from the wide-ranging tariff regime is bound to get a mention from the Reserve Bank (RBNZ) when it releases its Official Cash Rate (OCR) rate review on Wednesday.

Analysts expect a 25-basis-point cut to 3.50%, but the market is starting to price in a small chance of a 50-basis-point reduction, in recognition of fears that tariffs could stymie a nascent economic recovery and dampen world growth prospects.

World sharemarkets have been melting down since the tariff announcement last Thursday (NZT), but interest rates and currency markets have been volatile too.

The New Zealand dollar traded today at US55.60c, down from its pre-Liberation Day level of US57.70c after initially rallying to US58.50c on the news.

The spike higher was on the back of US dollar weakness, but its declines late last week were on the back of “risk-off” trades – selling on the back of weaker world growth prospects.

The likely economic impact that high tariffs would have on China, and its retaliation in kind, have also added fuel to the Kiwi’s decline.

Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said the tariff news had changed the interest rate and currency outlook.

“All of a sudden we now have got 100 basis points of rate cuts priced in by November [from 75 previously],” he said.

Where the OCR ends up – known as the terminal rate – is now seen as being around 2.75% from 3 to 3.25% before.

In the swaps market – which can influence home mortgage rates – two-year rates have dropped to 3.10% from 3.40% before Trump’s announcement.

While the tariff news has roiled sharemarkets, investors seeking safe havens and fearing possible recession have turned to US 10-year Treasuries, driving yields down to 3.93% from 4.20% last week.

In bonds, yields fall when bond prices rise.

Pepper said the US 10-year bond yields would have fallen further still had it not been for fears of US inflation getting away again with tariffs in place.

While a 50-basis-point cut from the RBNZ appears unlikely, market attention will focus on the minutes of the monetary policy committee as to whether such a cut was discussed.

BNZ, in a market commentary, said US55c remained a support level “but a downward break is entirely plausible if a deep global downturn ensues”.

“The prevailing situation doesn’t feel as bad as the Global Financial Crisis where NZD/USD reached an intra-day low of 0.4895,” the bank said.

“Of some comfort is that we consider NZD/USD already to be trading at an extremely low level, which should limit the potential for further downside from here and a case might be building that we are close to peak pessimism on tariffs,” BNZ said.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.