The base case of analysis team of TDS is for patience from the RBNZ, leaving the cash rate at 1.75% through to May 2018 while the risk, of course, is that the first hike of the cycle occurs much sooner, possibly in November, or February.
- The exchange rate: the RBNZ in March said “The TWI has fallen 4% since February … this is an encouraging move, but further depreciation is needed”. We have no doubt that the RBNZ prefers the TWI to fall from here, and hence will avoid making hawkish noises. The TWI at 76.7 is tracking well below the RBNZ projection of 78.9 for Q2.
- Mortgage rates for fixed rate mortgages (77% of mortgages) have been rising for months, as costs of funding and capital requirements continue to squeeze the banks. In fact, 2yr rates are up +50bp over the past six months. If key mortgage rates are rising, does the RBNZ need to follow through so soon?
- Inflation expectations: the major surveys are still tracking below 2%. Historically, inflation expectations need to be accelerating towards 2½-3% before the RBNZ pulls the trigger. Will the next set of surveys follow the pop in fuel and headline inflation? The RBNZ will be monitoring closely.”