Breaking: A 'hawkish' RBNZ leaves OCR on hold at 1.0% (NZD jumps to 0.6442 resistance)

In its first policy meeting since 13 November, the Reserve Bank of New Zealand, (RBNZ), which was universally expected to hold its Offical Cash Rate (OCR) at 1%, but at the same time signal that they stand ready to cut the OCR should that be required by the coronavirus situation, has delivered a cautiously hawkish no-change decision as follows leading the kiwi to rally:

RBNZ interest rate decision

• OCR on hold at 1.0%.
• No chance of a rate cut in 2020.

What had been expected & RBNZ verdict on coronavirus

Markets were in anticipation of this meeting, but were more concerned about the forward guidance, universally expecting the RBNZ to be on hold.

Analysts at Westpac, prior to the meeting, argued that "if coronavirus quickly blows over like SARS did, then the RBNZ can revert to an on-hold outlook for the OCR at its next communique. Should economic disruptions from coronavirus intensify, the RBNZ may consider cutting the OCR to help offset any negative impact on employment. Markets are 60% priced for a rate cut by June."

RBNZ verdict:

• RBNZ says overall impact of coronavirus on New Zealand will be of a short duration. 
• RBNZ says risks that impact will be larger and more persistant.
• Members agreed that monetary policy had time to adjust if needed as more information on coronavirus became available.

NZD/USD analysis 

Before the announcements: NZD/USD Price Analysis: How will the RBNZ affect NZD/USD?

After the announcements: NZD/USD was sat at just above the 0.64 handle into the meeting with the immediate resistance at 0.6420 and 0.6450 while the downside levels were 0.6390 and 06370. In the outcome prior to the Press Conference, NZD/USD has jumped to 0.6442 and then to 0.6453 resistance in the update three minutes post the announcement. The upside bias is intact for a test of the 0.65 handle as described in NZD/USD Price Analysis: How will the RBNZ affect NZD/USD?.

Key notes from the MPS

• RBNZ sees official cash rate at 1.89% in March 2023.
• RBNZ sees TWI NZD at around 72.2% in March 2021 (pvs 71.5%).
• RBNZ sees official cash rate at 1.03% in March 2021 (pvs 0.9%).
• RBNZ sees official cash rate at 1.01% in June 2020 (pvs 0.9%).
• RBNZ sees official cash rate at 1.1% in June 2021 (pvs 0.94%).
• RBNZ sees annual CPI 1.7% by March 2021 (pvs 1.7%).

• RBNZ says policy has time to adjust if needed.
• RBNZ says overall impact of coronavirus on New Zealand will be of a short duration.
• RBNZ says risks that impact will be larger and more persistant.
• RBNZ says low interest rates remain neccessary.
• RBNZ says expects economic growth to accelerate over the H2 2020.

RBNZ Minutes

• Monetary Policy Committee noted that employment was at or slightly above its maximum sustainable level.
• Committee agreed low interest rates had helped to get employment and inflation to around their target levels.
• Committee discussed financial stability risks from ongoing low rates.
• Members noted the bank’s assessment that marginal changes to the ocr would not materially affect these risks at this time.
• Members discussed the better mix of policy stimulus in the projections, given additional fiscal stimulus is reducing the burden on monetary policy.
• Committee discussed alternative cash rate settings and the various trade-offs involved.
• Committee agreed that ongoing low interest rates were needed to keep inflation and employment close to their mandated targets.
• Recent developments consistent with continuing to meet inflation, employment objectives.
• Coronavirus situation a complicating factor given how quickly it was changing and the limited information available.
• Committee discussed that the impact of fiscal stimulus could be greater than assumed.
• Committee discussed monetary policy implications if the impacts of coronavirus outbreak were larger and more persistent than assumed.
• Members agreed that monetary policy had time to adjust if needed as more information on coronavirus became available.