RBNZ cuts OCR by 25bps to 1.75% - ANZ

Research Team at ANZ, notes that as widely expected, the OCR was cut by 25bps to 1.75% and the OCR forecast track suggests that RBNZ is done, with around a 20% chance of another cut built in.

Key Quotes

“The last sentence of the assessment (“numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”) acknowledges that risk so we have a mild easing bias but nothing more. We think that is entirely appropriate.”

“In response the NZD lifted half a cent and the 2 year swap is up 10 points (though a lot of the latter move will be offshore-driven). OIS markets are locked on 1.75%. Although we do not believe the New Zealand economy is in need of as much monetary policy stimulus as it is getting at present, today’s Statement and forecasts were a reasonable compromise given the Bank had painted itself into a corner with strong signalling.”

“Recent inflation data has been more mixed, with only the vaguest hints of a turn upwards. On this front the RBNZ rhetoric and forecasts were little changed (annual CPI 1.3% in March 2017, vs 1.1%). More notable was that the comment expressing concern that inflation expectations may decline further was dropped from the policy assessment.”

“The strong NZD will continue to frustrate (the TWI is trading over 79 vs. 77 in the RBNZ’s track and has naturally popped higher following today’s statement). The RBNZ says the NZD is “higher than is sustainable for balanced economic growth” and “a decline in the exchange rate is needed.” Short a global event we doubt they’ll get it, given the domestic growth backdrop. This keeps the bias for rates lower for longer to ensure a lift in non-tradables inflation and inflation expectations.”

“We agree with the spirit of the RBNZ’s economic assessment. Strong, above-trend growth is eating into capacity, the NZD is likely to remain high, and housing is a financial stability concern. Although macro-prudential measures do appear to be working, the RBNZ is wary of assuming victory prematurely: “Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.”