RBNZ smiles as NZD plummets - BNZ

Stephen Toplis, Head of Research at BNZ, suggests that the Reserve Bank of New Zealand should be feeling a bit happier about its lot after a series of statements that have driven the currency lower and got the market pricing in further easings.

Key Quotes

“This is a far cry from where we were a week ago when it looked like there was no stopping the NZD’s strength and talk of rate cuts had been obliterated by fears around the housing market.

In today’s late-scheduled update, the RBNZ was very clear in identifying that monetary policy will be firmly directed at the pursuit of getting inflation back to the midpoint of its inflation target band. We can disagree with the efficacy of doing so but at least the Reserve Bank is clear as to its intent.

Accordingly, there is even less doubt in our mind that the RBNZ will cut the cash rate by 25 basis points at its August Monetary Policy Statement and, at the same time, publish a forward track which suggests at least one more rate cut thereafter.

For completeness sake, today’s RBNZ statement runs through all the key issues facing the economy and its inflation forecasts. There was nothing new in this regard. That said, we thought it notable that the Bank highlighted the fact that “prospects for growth in the global economy have diminished” post Brexit. International concerns have often been cited by the Bank as a reason for lowering interest rates in the past.

Moreover, the Bank also highlighted its concern that “short-term inflation expectations remain low”. We had thought that the slow upward drift that we had been seeing in short term inflation expectations would have pacified the RBNZ but it seems not.

Importantly, and not surprisingly, the RBNZ has shifted from “further policy easing may be required” when it produced its June Statement to “it seems likely that further policy easing will be required”. It doesn’t get any clearer than this.

We are sticking with our view that the RBNZ will cut in August – a view that is now almost fully priced in by the market. The market has also fully priced in a second cut by February with the possibility of one more thereafter. This is now very close to our own view. However, if there is to be a second cut it is highly unlikely the RBNZ would wait until next year to do so. Formally, we have November penciled in but a further reduction in September is a real possibility as, indeed, is the possibility of even more.”