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RBNZ: Tiptoeing through the minefield - BNZ

Stephen Toplis, Head of Research at BNZ, notes that the RBNZ left the cash rate unchanged at 1.75%, but becomes a trifle hawkish as inflation forecasts were raised and new government policies are embedded into forecasts.

Key Quotes

“Writing today’s Monetary Policy Statement must have been a nightmare for RBNZ officials as they, like everyone else, pondered life under a very different parliamentary regime. And it’s made all the more difficult by the fact that while the general thrust of new policy is understood, the detail is far from clear – yet.”

“Additionally, outside of government policy changes, which are, on balance, clearly inflationary, there were increased signs that an inflationary pulse was already developing elsewhere via the lower New Zealand dollar, tightening labour market and strengthening global activity.”

“With short term inflation now more elevated, forecast annual CPI inflation climbs to 2.1% in June 2018 whereas it previously hit 2.0% in March 2019.”

“With this backdrop, it is not surprising the RBNZ nudged its modelled interest rate track higher. According to this track, the cash rate still does not hit 2.0% until the March quarter 2020, as was the case in the August MPS. But the cash rate does edge 10 basis points higher in the June quarter of 2019, to 1.9%, implying that a rate increase could happen earlier than previously forecast. Moreover,with the addition of an extra quarter’s forecast, the RBNZ has put a second rate hike into its forecast track by Q4, 2020.”

“The Bank, for the first time in a very long time, has stated that it is relaxed about the level of the currency. Indeed, Governor Spencer went so far as to say that the currency is broadly at fair value. This was backed up by the fact that the Bank has left the TWI flat at 73.5 right through its forecast horizon. Following today’s MPS the NZD is marginally higher at 74.2, up from 73.7 immediately prior to the release of the MPS.”

“As today’s statement was largely in line with our expectations, our forecast rate track is unchanged. We still believe inflationary pressures will prove higher than anticipated and that the Bank will end up raising interest rates in the second half of 2018 but, equally, we can understand that given the degree of uncertainty that prevails the Bank is not likely to formally suggest such a move any time soon. We would, however, expect each statement from here on in to get progressively more aggressive.”

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