RBNZ fails to meet market expectations - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the New Zealand dollar is stronger today with the RBNZ cut of 25bps to a record low of 2.00% clearly not meeting the expectations in the market where the pricing indicated close to a 40% probability that the RBNZ would have cut by 50bps today.

Key Quotes

“NZD/USD had already advanced by over 4.0% since late July ahead of the meeting and hence the follow-through post-announcement has not been so severe. Still, the intra-day high reached today was to a level not seen since May of last year.

The statement and then the comments from RBNZ Governor Wheeler indicate that the currency lies very much at the centre of the central bank’s frustrations in getting inflation back into the target range. A full paragraph was designated to explaining the fact that global conditions and monetary easing elsewhere had resulted in the exchange rate being “significantly higher” than assumed in June. This was causing negative inflation in the tradeable sector.

The conclusion was clear – a “decline in the exchange rate is needed”. But clearly the RBNZ is not convinced that the best way to do this is through aggressive cuts to the Official Cash Rate. The statement also acknowledged that the domestic economy was doing well bar the fact that low dairy prices were depressing incomes. House prices were also described as “excessive”.

The statement did end with the explicit forward guidance that “further policy easing will be required” so additional easing will very likely take place. The Q2 2017 90-day Bill rate was forecast at 1.8% by the RBNZ versus a forecast of 2.1% in June. But that extent of further monetary easing looks unlikely to undermine the New Zealand dollar notably which does throw up the prospect of the RBNZ becoming more active with intervention. Governor Wheeler was asked about intervention policy but declined to comment.

We certainly see a much greater prospect of more active intervention if NZD/USD continues to move higher. The problem though is that RBNZ today has suggested more aggressive rate cuts are incompatible with current economic conditions by stating more aggressive cuts would result in the economy “overheating”. If the RBNZ is correct, then intervention might not prove very fruitful.

We suspect more volatile global conditions after the summer period might prove more helpful in pushing NZD/USD lower but sharp declines are very unlikely.”