The Reserve Bank of New Zealand completely dropped its tightening bias at today’s monetary policy meeting. The bank noted that a period of assessment remains appropriate before considering further policy adjustment, dropping a line from September’s statement that stated that further tightening was expected and necessary to keep future average inflation near the 2% target mid-point and ensure that the economic expansion can be sustained.
We suggested this may happen in our RBNZ preview given the surprisingly low inflation numbers for Q3. Consumer prices rose 0.3% q/q, missing an expected 0.5% increase. This brings year-on-year inflation to 1.0% from 1.6% previously. This is at the bottom end of the RBNZ’s target range of 1-3%.
As we stated yesterday, the RBNZ will not want to risk stalling NZ’s economic recovery and, in any event, the bank’s prior imputes to tighten monetary has largely been removed with the cooling of the housing market (the RBNZ’s macro-prudential tools are akin to at least one 25bps rate hike from the perspective of the housing market) and softening commodity prices. At the same time, the RBNZ doesn’t want to risk strengthening the kiwi. A strong exchange is a big drag on growth in an export based country such as NZ.
Some banks have now pushed out their expectations for tighter monetary policy in NZ. At this point it seems likely that the RBNZ will not raise the official cash rate until late Q3, 2015, at the earliest. Some analysts are suggesting that the bank will not tighten policy until 2016, which may be overly dovish in our opinion. In saying that, a further deterioration of NZ’s inflation outlook may keep the RBNZ on the sidelines for all of next year. Net migration and strong construction growth should prevent the need for looser monetary policy.
NZDUSD
NZDUSD was assaulted twice in as many hours. First the USD surge on the back of a slightly more hawkish than expected Fed hit NZDUSD hard, which was followed up by today’s dovish tone from the RBNZ. The end result saw the pair loose around 180 pips at its lowest point. Short-term technical indicators suggest that the pair may be oversold but our long-term bias remains lower this point.
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