RBNZ Preview: Eight major banks expectations

The Reserve Bank of New Zealand (RBNZ) will announce its Interest Rate Decision on 11 June at 02:00 GMT. The market consensus is for the RBNZ to stay on hold and to expand the size of the Large-Scale Asset Purchase (LSAP) from the current NZD 60 billion. Here are the expectations forecast by the economists and researchers of eight major banks regarding the upcoming central bank's meeting.

See – RBNZ Preview: Ending NZD/USD's recovery attempt? Dovish stance on QE and coronavirus may weigh


“We expect the overall tone of the MPS to be very dovish, adding weight to our view that the NZGB curve will continue to move gradually lower and flatter. While we expect the LSAP to be increased to $90 billion, sending a very strong signal, we wouldn’t automatically regard anything less as underwhelming. If, for example, the RBNZ lifted QE to $75 billion, moved to a constant run rate, and signalled that negative rates are their preferred next step, we would expect interest rates to rally. Looking further ahead, risks are skewed towards more stimulus in time, and so there will be enormous interest as to what the next steps are beyond the QE programme. The RBNZ will have an open mind about what happens next, and so do we. We think all options will remain on the table, including a negative OCR and foreign asset purchases.”


“The RBNZ will aim to keep the stance of monetary policy unchanged at next week’s MPS. The OCR will remain at 0.25%, and the RBNZ will commit to keeping it there until at least March 2021. The RBNZ may keep the LSAP at $60bn to May 2021, without any guidance on what will happen beyond then. An equivalent alternative would be to extend the LSAP to August 2021 and lift the cap to $70bn. We expect that the LSAP will last for two years and will eventually total $90bn (previously $100bn). We expect that the OCR will fall to -0.5% in April next year, because there is a need for more monetary stimulus than the LSAP alone can provide.”

Standard Chartered    

“We expect the RBNZ to keep the official cash rate unchanged at 0.25% and maintain its easing bias at the 12 August monetary policy meeting. Despite positive COVID developments, the outlook is uncertain. We would watch for the RBNZ’s outlook on its large-scale asset purchases programme, which can only be increased by another NZD 11 billion, based on current government borrowing requirements and the indemnity cap. The pace of QE purchases has eased from April-May levels and yields have remained contained, suggesting no immediate need to increase purchases. The risk is that the central bank increases the QE programme in anticipation of an increase in the bond programme as part of the pre-election fiscal update on 20 August. The RBNZ may outline its readiness to deploy alternative monetary policy tools. Comments in the June statement suggested some views that the downturn could be prolonged. Governor Orr has noted that QE is more effective in dealing with a virus shock than negative rates, which are more suited to addressing a low, long economic contraction. We see an increasing risk of a rate cut in 2020 and potentially negative rates in 2021. Foreign asset purchases are unlikely due to risk of a backlash and currency wars.”


“While a decision to keep the OCR unchanged will come as no surprise we expect the RBNZ to announce an increase in the size of the LSAP program (from NZD 60 billion to NZ $78 billion) and for the program to be extended to Aug'21. The RBNZ could also announce an alternative set of measures to reduce the cost of funding.”


“We expect (along with consensus) no changes to the policy rate. Still, there is an increased chance that the Bank will decide to adjust both the size and shape of its quantitative easing programme to add further monetary stimulus ahead of peaking bond issuance. A boost in the size of the programme may be followed by the alignment with the RBA’s yield curve control, although there have not been clear indications in this direction. NZD will be particularly reactive to any currency comments as the RBNZ has already highlighted on more than one occasion its negative impact on imports. The threat of negative rates should remain in place (possibly, with the aim of curbing NZD appreciation), but we are still reluctant to see the Bank embarking into such policy. All in all, the impact on NZD of the rate announcement could be broadly balanced, and markets will remain focused on US-China tensions given the high NZD exposure to China.”


“RBNZ policy will be left unchanged but risks are dovish. Activity data since the last forecast in May has recovered sufficiently to justify an upward revision to growth forecasts. However, of greater focus for markets will be the RBNZ's review of its monetary policy tools -especially around the potential to adjust the LSAP (currently NZD 60 billion), purchasing foreign assets or implementing negative interest rate policy. Seasonality shows that there is more risk avoidance in August than in other months, and in the G10 currency space NZD tends to fall in line with AUD. This is an anomaly, and we see no clear reason for this type of seasonality. However, with a general election due in September, if the market environment this year changes to risk-off again, the probability that NZD will depreciate over the next month, even if only temporarily, is likely to get higher.”


“We cannot rule out the possibility of negative interest rates in time, but that will come with considerable baggage and we do not expect the RBNZ to employ that option for now. It will continue to use volume announcements (eg the programme is currently NZD 60 billion in size) as it fine-tunes its policy stance. We expect QE to be expanded to a cap of NZD90 billion by August. Another option for the RBNZ is to adjust the QE programme to a type of ‘yield curve control’.”


“Market participants are expecting a dovish outcome from the RBNZ policy meeting. It follows recent communication from the RBNZ stating that they will review current policy options at their upcoming meeting. The review will include reassessing the “appropriate quantum” of their asset purchase programme as well as discussing other unconventional policy tools such as a term lending facility, negative rates, forward guidance and potentially purchasing foreign assets (as part of FX intervention). The market is anticipating that the current asset purchase limit will be increased beyond NZD 60 billion. Any further comments on negative rates or FX intervention will have more impact at weakening the New Zealand dollar. On the other hand, it is not a done deal that the RBNZ will provide more stimulus as soon as this week. Domestic economic data has surprised to the upside relative to their forecasts in May. New Zealand’s success in eliminating COVID-19 has allowed the economy to re-open more fully than other major economies according to the latest COVID-19 policy stringency indices. The sharp drop back in business confidence in August does though provide some more caution. The RBNZ will be aware as well that the NZD will strengthen if they disappoint expectations for further easing, and have already expressed concern over recent strength.” 


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