RBNZ: Under-Delivers? - BNZ

Stephen Toplis, Head of Research at BNZ, suggests that the financial markets were looking for the Reserve Bank Governor to deliver a relatively aggressive Monetary Policy Statement today and as far as the market was concerned, they didn’t get it.

Key Quotes

“Consequently, the NZD headed forever higher and the markets started to question how low rates might go and how quickly. In part this response was justified as the RBNZ’s easing rhetoric was not especially strident and the published timing of future cuts shows a very slow process.

In other ways the market reaction was a tad overdone in that there was never going to be the 50 basis point cut that some foresaw and, to be fair to the Bank, the possibility of the cash rate going down to 1.5% (below what the market was and is still pricing) is left wide open.

The Reserve Bank is clearly even more of a reluctant cutter than we had already believed. In its statement today it, technically, doesn’t actually have another rate cut until the first quarter of 2017 with the possibility of one more before May. We think that the delay is a bit weird given that the Bank also says that “our current projections and assumptions indicate that further policy easing will be required”. If they are so dogmatic about this, why wait?

While we are a tad more uncertain, now, as to how to interpret the RBNZ’s latest set of scenarios we will still take the Bank at its word. In this regard, we thought it notable that the Bank highlighted the fact that its two key assumptions were that:

• Global conditions improve, generating a modest depreciation in the New Zealand dollar exchange rate; and

• Inflation expectations gradually increase and reduce their drag on headline inflation.

In our opinion, the risks to these assumptions are to the dovish side. Clearly, the NZD is already higher than anticipated and inflation expectations could well be constrained for longer as annual headline inflation falls, potentially, sub-zero. It was also interesting that the RBNZ did not repeat its upside scenario for interest rates due to higher house prices. This reaffirms the Bank’s easing bias.

All things considered then, and noting there is still significant uncertainty as to the exact way ahead, we can reasonably comfortably conclude that:

• There will be at least one more rate cut;

• The balance of risk is for even more;

• The cash rate is going to be at least as low as it is now for a long time;

• Inflation is likely to continue surprising to the downside in the near term; and

• Only when the rest of the world plays ball will the NZD wilt.”