30 Apr 2015
RBNZ edging closer to cutting rates - Capital Economics
FXStreet (Bali) - The RBNZ is edging closer to cutting rates, notes Paul Dales, Chief Australia & NZ Economist at Capital Economics.
Key Quotes
"Although the Reserve Bank of New Zealand once again left interest rates unchanged today, the shift from a neutral policy bias to an implicit loosening bias supports our view that interest rates will be cut from the current 3.5% to 3.0% by the end of the year. The New Zealand dollar has weakened in response and it could eventually decline to around US$0.70 from US$0.76 now."
"Whereas the policy statement from the previous meeting referred to a "period of stability" and said that the next change in interest rates could be "either up or down", the statement released alongside today's decision said that the Bank "is not currently considering any increase in interest rates" and that "it would be appropriate to lower the OCR" (official cash rate) if demand weakens or inflation expectations settle
at low levels. In other words, and as Assistant Governor John McDermott hinted in a speech last week, rate hikes are off the table and the RBNZ is now considering whether it should cut rates."
"As such, the willingness of the RBNZ to tolerate very low rates of inflation is already fading. Of course,
the RBNZ was always going to look through the temporary petrol-related plunge in headline inflation to 0.1% in the first quarter. But it is clearly becoming concerned by the very low rates of underlying or core inflation, which fell below the 1-3% target range in the first quarter. The RBNZ is worried that this will lead to a permanent fall in inflation expectations that would be hard to reverse."
Key Quotes
"Although the Reserve Bank of New Zealand once again left interest rates unchanged today, the shift from a neutral policy bias to an implicit loosening bias supports our view that interest rates will be cut from the current 3.5% to 3.0% by the end of the year. The New Zealand dollar has weakened in response and it could eventually decline to around US$0.70 from US$0.76 now."
"Whereas the policy statement from the previous meeting referred to a "period of stability" and said that the next change in interest rates could be "either up or down", the statement released alongside today's decision said that the Bank "is not currently considering any increase in interest rates" and that "it would be appropriate to lower the OCR" (official cash rate) if demand weakens or inflation expectations settle
at low levels. In other words, and as Assistant Governor John McDermott hinted in a speech last week, rate hikes are off the table and the RBNZ is now considering whether it should cut rates."
"As such, the willingness of the RBNZ to tolerate very low rates of inflation is already fading. Of course,
the RBNZ was always going to look through the temporary petrol-related plunge in headline inflation to 0.1% in the first quarter. But it is clearly becoming concerned by the very low rates of underlying or core inflation, which fell below the 1-3% target range in the first quarter. The RBNZ is worried that this will lead to a permanent fall in inflation expectations that would be hard to reverse."