NZ: The doves are here to stay – Standard Chartered

Analysts at Standard Chartered are delaying their RBNZ’s rate-hike call to Q4-2019 (from Q1-2019) and revise down their 2018 NZ GDP forecast to 2.5% from 2.7% on a highly dovish central bank stance and a softer growth outlook.

Key Quotes

“The Reserve Bank of New Zealand (RBNZ) lowered its projections for growth, inflation, the output gap and the official cash rate (OCR) in its August monetary policy statement (MPS) relative to May.”

“We believe the RBNZ would like to keep monetary policy accommodative for longer to support growth. The first OCR hike has been delayed by four quarters (to Q3-2020 versus Q3-2019), compared to one-quarter tweaks at previous meetings.”

“Major cuts to forecasts of growth and the output gap, rather than inflation, were likely behind this significant delay.”

“We still forecast a hike in Q4-2019, as we expect higher growth and an inflation pick-up in H2-2019.”

“We see room to ease back some accommodation, as the current OCR at 1.75% is much lower than the neutral estimate of 3.5%. While risks to inflation projections are likely to the upside, the RBNZ may stay on hold until it sees sustained underlying inflationary pressures.”

“The money markets are pricing in a small probability of rate cuts over the next year in response to a dovish RBNZ.”

“We think this is premature and do not see rate-cut expectations increasing unless growth disappoints significantly.”

“We do not expect further NZD weakness, although trade tensions and USD strength may prevent a short-term recovery in NZD-USD. We forecast NZD-USD at 0.66 by end-2018 and expect a recovery to 0.74 by end-2019.”