The RBNZ struck a surprisingly dovish chord in last week’s OCR review, reiterating that the OCR could still move lower in coming quarters and that it would remain at or below current levels until the latter part of 2010.
The tone of the statement was, if anything, more downbeat than in the June Monetary Policy Statement.
There was no acknowledgement of the improving global outlook, which other central banks have picked up on recently, or the domestic factors that are setting the stage for recovery: rising net migration, the pickup in housing activity, improved business and consumer confidence, and the ongoing easing in effective interest rates as borrowers reset at lower levels.
The recent gains in the New Zealand dollar came in for particular attention. In recent times the RBNZ have highlighted the risk that a higher currency could skew the recovery towards borrowing and spending, at the expense of exports. But their latest statement suggests they now believe the NZD could derail the recovery altogether: “The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings.” That implies two stark options: either the currency heads lower, or the cash rate will.
But there is a third option (which is, implicitly, our central view): that the economic outlook continues to improve in line with what currency markets have already anticipated. As we’ve said before, if the market is overestimating the strength of the recovery, then the NZD is likely to fall of its own accord; and if the market is correctly anticipating the recovery then a stronger NZD won’t be enough to cancel it out. It’s not obvious that markets have got it wrong to date: they were quick to incorporate the now widely-held view that a repeat of the Great Depression had been avoided, and more recently they have correctly anticipated the stabilisation and recovery in some segments of the global economy.
