RBNZ squeezes a last cut – Nomura

Research Team at Nomura, notes that the RBNZ cut its policy rate by 25bps to 1.75% yesterday and maintained its easing bias, noting once again that their projections and assumptions indicate that policy settings will see growth strong enough to have inflation settle near the target range.

Key Quotes

“While we do think this communique reflects a more neutral stance to the further easing measures, it still suggests that the RBNZ is open to a further cut if the outlook was to deteriorate. However, the new forecast suggests that the RBNZ does not expect that it will be required to cut rates over the projection period. This was confirmed during the press conference when Gov. Wheeler stated that they do not expect to cut rates at this point

On the external backdrop, the Bank remains cautious, pointing towards weak global inflation "even though commodity prices have come off their lows" and heightened political uncertainties, probably in relation to the outcome of the US presidential elections and the upcoming political events in Europe.”

The Bank remained positive on the domestic economy, pointing out that growth was supported by "strong population growth, construction activity, tourism, and accommodative monetary policy". Dairy auctions have also provided further positive signalling, and high net immigration is supporting growth in labour supply while limiting wage pressures. On the higher dairy prices, we note that they are the result of weaker supply which will be a drag on growth.”

“On FX, the central bank continued to reference how the weak external growth backdrop and low interest rates relative to New Zealand continue to play an important role in producing upward pressures on NZD. The Bank reiterated its desire for a weaker currency, noting that “The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed”.”

“Overall, we think the communique reflects some degree of conflict in their concerns over lower inflation rates (exacerbated by continued strength in the currency) on the one hand, and on the other hand, the reality of a domestic economy that has been quite encouraging on the growth front (e.g., strong consumer demand and employment) and continued concern regarding financial stability. The latter factors likely contributed to the ultimate assessment that further rate cuts may not be necessarily in the near term. This is a slightly more neutral communique than we expected but confirms our expectation that the RBNZ will be on hold for some time.”