RBNZ Governor Wheeler rules out rapid rate cuts – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the New Zealand dollar has been the best performing currency in the Asian trading session rising back towards its recent high from earlier this month against the US dollar at 0.7341 which is the next key resistance level.

Key Quotes

“The New Zealand dollar has derived support overnight from comments by RBNZ Governor Wheeler who stated that “we do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings”. He believes that “rapid ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottle necks, and further inflame an already seriously overheating property market”.

The comments signal that the RBNZ is likely to leave its monetary policy unchanged at their next meeting in September after lowering rates this month. The next rate cut is more likely to be delivered in November. The comments also argue against the RBNZ lowering rates in increments of more than 0.25 percentage point.

The RBNZ’s reluctance to ease monetary policy further in the near-term is encouraging the build-up of carry demand for the kiwi which has already contributed to it becoming the most overvalued G10 currency according to our long-term valuation framework. As a result the RBNZ will have to tolerate a stronger currency if it remains reluctant to lower rates more rapidly. Unless the Fed finally follows through with their plan to tighten monetary policy this year, although we believe that it remains unlikely rate hikes will resume as early as next month given the Fed’s cautious policy stance.

The Fed continues to signal that it is more wary of making a policy mistake by tightening policy too quickly rather than too late. In his recent blog, former Fed Chair Bernanke even suggested that the Fed could tolerate running the economy a little hot in an attempt to encourage higher productivity growth.   

However, if the Fed did resume rate hikes in September it could provide a healthy wake-up call for the market and prompt a period of market instability particularly after the strong search for yield which has taken place in recent months. The Fed should be wary that maintaining its current loose policy stance is increasing financial stability risks by encouraging excessive risk taking. The recent record highs for the US equity market which has made it even more overvalued relative to earnings may have drawn some concern, although rising asset prices have been encouraged by the Fed as a channel to help support economic growth.”