RBNZ: Tackling the tension

Philip Borkin, Senior Economist at ANZ, suggests that today’s “special” economic update is clearly about increased RBNZ concern with NZD strength.

Key Quotes

“That is not really a surprise. Notwithstanding the RBNZ maintaining a positive assessment of the domestic economic outlook and reiterating ongoing housing-related financial stability concerns, it noted that “a decline in the exchange rate is needed” and that currency strength “makes it difficult for the Bank to meet its inflation objective.” It effectively signals a return to a MCI type focus, and opens the door to additional monetary policy easing.

Together with the latest LVR limit proposal, the RBNZ appears to have gone into full attack mode in an attempt to tackle some of the considerable tensions it is facing. Admittedly, we’re not convinced the economy actually needs more easing right now (at the margin we think capacity is being eaten into faster than the RBNZ assume). But by the same token, inflation remains too low, and we acknowledge that rate cuts are coming. Global interest rates are plunging, and in a world of currency divergence (from fundamentals), interest rates ultimately need to converge.

The signal from the Bank today is that an August OCR cut is very likely; as is at least one further cut beyond that (our current forecast is February). But for the market to push a more aggressive easing cycle beyond that we need to see concrete action from the RBNZ, as well as evidence that the domestic data flow is turning and macro-prudential tools are biting. That may be some way off yet. That said, with reasons for NZD strength remaining, in this new MCI-type focused world, this will keep the bias for short-end rates to continue testing lower.”

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