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RBNZ tightening cycle not over but way off until next hike - Westpac

FXStreet (Bali) - According to Westpac Economists, while the RBNZ may still be thinking to hike rates further down the road, it could be a way off until it happens given receding inflation pressures.

Key Quotes

"First of all, the RBNZ will want to be certain that the economy is continuing to grow at a healthy pace as the boost from last year’s strong commodity prices continues to fade (on this front, prices were down another 3.1% in the latest Global Dairy Trade auction)."

"Conditions also look pretty solid in the household sector. Following a strong 1.5% increase in retail spending the September quarter, spending remained firm in October, and consumer confidence is still at above-average levels."

"On top of this, we’re seeing signs that the housing market may be starting to pick up again. In October the seasonally-adjusted value of new mortgage approvals jumped 8%. New listings of houses for sale on realestate.co.nz jumped 12%, seasonally adjusted."

"With continuing strength in activity, the next thing the RBNZ will be looking for are signs that inflation is increasing. And this is (still) the missing piece of the puzzle. Headline inflation was just 1% in the year to September – right at the bottom of the RBNZ’s target band. Other price measures have also pointed to a subdued inflation environment. Retail prices were down 0.6% in the September quarter. Over the same period input price inflation outside of the construction sector remained low."

"Low inflation is giving the RBNZ plenty of time to sit on its hands. We’re not pencilling in another hike until the second half of 2015, and markets are only pricing in around 45 bps of tightening over the next two years. The outlook for interest rates could be wound back even further if inflation continues to undershoot expectations, as it has for the past three years. And given the recent declines in international oil prices, this is definitely a risk. However, we’d caution against being overly complacent with regard to inflation. Given the ongoing strength in the domestic economy, particularly the construction sector, we can’t rule out the risk that inflation could eventually return with a vengeance."

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