The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 9 June. At the 27 April meeting, the RBNZ kept its policy rate unchanged at 2.25% and signalled that further rates cuts were likely, saying “further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”
Although we think the decision will be a close call (and the consensus agrees with 7 out of 15 economists expecting rates on hold), we believe that, ultimately, concerns about renewed strength in the housing market and decent domestic data will matter more than the weakness in inflation and inflation expectations, and the strength of NZD and that the RBNZ will leave its policy rate unchanged.
Because of the RBNZ’s focus on inflation, we believe that the most likely timing for the next rate cut will be at the August meeting. This would allow the central bank to have the CPI data for Q2 at hand and to have devised new measures to cool the housing market.
The publication of the Monetary Policy Statement (MPS) at next week’s meeting raises the likelihood of policy action, as it provides a communication opportunity to make the case for the policy decision and the RBNZ has proven in the past that it likes to change policy at a meeting that coincides with the release of the MPS. We believe the RBNZ could lower its forecast for growth and inflation slightly as a result of the continued strength in NZD.
There is currently little priced in for next week’s meeting, about 8bp is currently priced in. This means that, if the RBNZ keeps rates on hold but continues to signal openness on cutting later this year, the impact on the currency is likely to be small. However, if it decides to surprise and cut, NZD would likely depreciate meaningfully, given its recent strength and positioning.
Copyright © 2016 Nomura, eFXnews™Original Article
