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RBNZ: Low inflation to delay resumption of tightening cycle - BNZ

FXStreet (Bali) - In view of BNZ Research Team, the recent low inflation reading in New Zealand, suggests a further delay to the re-commencement of the tightening cycle.

Key Quotes

"The focus this week will be Thursday’s RBNZ OCR announcement, especially following last week’s low CPI print. No change in the OCR is as certain as it can be. At the time of the September MPS, the RBNZ was obviously unsure about when the next rate hike might be required. That degree of uncertainty will have only risen as inflation is not behaving as the central bank thought it would."

"Indeed, all other things being equal, the low inflation outturn would suggest a further delay to the re-commencement of the tightening cycle compared to that which the Bank suggested in September. So we expect the tone of the short OCR-review missive to be more dovish than previous commentary as it acknowledges this."

"For now, low near term inflation is the key. The RBNZ is on hold. But while we think the RBNZ will remain on hold, we do not think it will go as far as dropping the idea that rates will eventually need to be raised again at some (distant) point in the future."

"For one thing, the Bank will be wary of encouraging market expectations which now price very little in the way of further rate hikes and re-heating a housing market that is already showing some signs of such, post-election (keep an eye out on Thursday for the latest weekly mortgage approval data that have perked up over the past two weeks)."

"Then there is the chance that the previous economic relationships do indeed still hold, but perhaps with a longer lag than previous, such that inflation beings to boot up swiftly next year. It bears thinking about even if it feels unlikely at this point. But one gets the feeling that the RBNZ will want to see inflation before acting again. At this stage, given the uncertainties prevailing, it would seem prudent to keep an open mind."

"Reiteration of the RBNZ’s angst with the strength of the NZD would not surprise, even though the currency has undershot the Bank’s most recent assumptions, for a change. In contrast, we would be surprised if the FX Transactions data, released later on Thursday, did not reveal that the RBNZ was again a net seller of the NZD in the month of September."

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