RBNZ: Playing a game of NZD chicken – ANZ

Research Team at ANZ, notes that the RBNZ OCR was maintained at 2.25% as expected (although far from universally) and while an easing bias was retained (“further policy easing may be required”) and the 90 day bank bill projection is still downwardly sloped (largely unchanged from March), the tone of the statement was slightly less dovish than previous – quite rightly in our view.

Key Quotes

“But also with a hook; they don’t want the currency to respond too far and it could (is likely) to bring them back to the table.

We see few surprises in the statement/assessment itself. The RBNZ has played with a straight bat in acknowledging the obvious. The economy looks in better health and inflation is expected to strengthen. The NZD is of course problematic, and this is tough balancing act. But it is appropriate to pause and assess given competing demands.

Tensions within the RBNZ’s thinking are clearly apparent and it continues to acknowledge “many uncertainties around the outlook”.

The door is still open to a rate cut – on currency strength more than anything. In fact the high NZD / OCR downside scenario (to sub 1%) has the NZD trading below where it is today! That hints of MCI style thinking!

We see the odds of a cut in August at just over 50%. The economy doesn’t need stimulus anytime soon. The combination of global wobbles (we expect some and it will be influential at the RBNZ), NZD strength, and pressure on local rates from higher funding costs are powerful forces bringing the RBNZ to the table again down the track. But that’s tomorrow’s story.

Near term, we expect the NZD and short end rates to be under pressure to pop higher on adverse positioning and confirmation of no change (recall that the market was pricing in around 30% odds of a cut).

However, with the currency still playing a role in upcoming deliberations, there’s a limit to how high the NZD can go, and we favour fading the initial knee-jerk reaction higher in both markets. In that regard we note that the Bank’s downside scenario (which takes the 90 day bill rate below 1%, pointing to an OCR at 0.75%) is associated with the TWI holding steady, rather than rising, suggesting the currency hurdle to easing is not overly high (especially if housing can be cooled via macro-prudential policy). In other words, we’re back to MCI trading.”