The New Zealand dollar defies the risk-off market, and the downbeat China Manufacturing PMI seen earlier on Monday, and keeps its bid tone intact, trading at 0.5735 at the time of writing, with a monthly high of 0.5744, just a short distance away.
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Chinese factory activity, as measured by the RantingDog Manufacturing Purchasing Managers’ Index (PMI), fell to contraction levels of 49.9 in November, versus market expectations of a slight slowdown to 50.5 from 50.6 in October. China is New Zealand’s main trading partner, and weak data from the Asian country tends to add negative pressure on the Kiwi.
Monetary policy difference between the Reserve Bank of New Zealand and the Federal Reserve
However, the New Zealand dollar opened the week on a somewhat positive note after rising 2.14% the previous week. A “tight cut” by the Reserve Bank of New Zealand, which signaled the end of the easing cycle, sent the pair higher last week.
Conversely, the US dollar remains on the defensive, as investors reassess the chances of the Federal Reserve cutting interest rates next week, amid weak macroeconomic data released after the reopening of the US federal government.
Later today, a positive surprise in the US November ISM Manufacturing PMI numbers may provide some support to the US dollar, but attempts to the upside are likely to remain limited. The Fed’s CME monitoring tool shows an 85% chance of a 0.25% rate cut after the December 10 meeting and two or three more cuts in 2026.
Frequently asked questions for central banks
Central banks have the main task of ensuring that prices in a country or region are stable. Economies constantly experience inflation or deflation when the prices of certain goods and services fluctuate. A continuous rise in prices for the same goods means inflation, and a continuous fall in prices for the same goods means deflation. It is the responsibility of the central bank to maintain demand by adjusting the interest rate. For the largest central banks such as the US Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of England (BoE), the mandate is to keep inflation near 2%.
The central bank has one important tool at its disposal to raise or lower inflation, and that is by adjusting its benchmark interest rate, known as the cash rate. At the moments announced in advance, the central bank will issue a statement on its interest rate and provide additional reasons as to why it will remain or change (lower or raise). Local banks will adjust their savings and lending rates accordingly, which will make it harder or easier for people to earn their savings or for companies to get loans and make investments in their businesses. When a central bank raises interest rates significantly, this is called monetary tightening. When the benchmark interest rate is lowered, it is called monetary easing.
The central bank is often politically independent. Members of the central bank’s policy board go through a series of committees and hearings before being appointed to a policy board seat. Each member of this board often has a certain conviction about how the central bank should control inflation and subsequent monetary policy. Members who want very loose monetary policy, with low interest rates and cheap lending, to boost the economy significantly while being content to see inflation just above 2%, are called “doves.” Members who want to see higher interest rates to reward savings and want to keep inflation down at all times are called “hawks” and will not rest until inflation reaches 2% or just below.
Typically, there is a chair or chair who presides over each meeting, needs to create consensus among the hawks or doves, and has the final say when it comes to dividing the votes to avoid a 50-50 tie on whether the current policy should be amended. The Chairman will often make live follow-up speeches, communicating the current cash position and outlook. The central bank will try to push its monetary policy forward without causing violent fluctuations in interest rates, stocks, or its currency. All central bank members will direct their stance towards the markets before the policy meeting. A few days before the policy meeting and until the new policy is announced, members are prohibited from speaking publicly. This is called a blackout period.
