New Zealand just left rates on hold, and now the Kiwi's squeezing higher

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As expected, the Reserve Bank of New Zealand left its overnight cash rate (OCR) unchanged at 2.75% at its October monetary policy meeting this morning.

Here is the policy statement released by RBNZ governor Graeme Wheeler. Our emphasis in bold for key phrases in the statement.

“The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.75 percent.

Global economic growth is below average and global inflation is low despite highly stimulatory monetary policy. Financial market volatility has eased in recent weeks, but concerns remain about the prospects for slower growth in China and East Asia especially. Financial markets are also uncertain about the timing and effects of monetary policy tightening in the United States and possible easings elsewhere.

The sharp fall in dairy prices since early 2014 continues to weigh on domestic farm incomes. However, growth in the services sector and construction remains robust, driven by net immigration, tourism, and low interest rates. Global dairy prices have risen in recent weeks, contributing to improved household and business sentiment. However, it is too early to say whether these recent improvements will be sustained.

House price inflation in Auckland remains strong, posing a financial stability risk. While residential building is accelerating, it will take some time to correct the supply shortfall. The Government has introduced new tax requirements and the Reserve Bank’s new LVR restrictions on investor lending come into effect on 1 November.

CPI inflation remains below the 1 to 3 percent target range, largely reflecting a combination of earlier strength in the New Zealand dollar and the 60 percent fall in world oil prices since mid-2014.

Annual CPI inflation is expected to return well within the target range by early 2016, as the effects of earlier petrol price falls drop out of the CPI calculation and in response to the fall in the exchange rate since April. However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.

Continued economic expansion is expected to result in some pick-up in non-tradables inflation, despite the moderating effects of strong labour supply growth.

To ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely. This will continue to depend on the emerging flow of economic data. It is appropriate at present to watch and wait.”

The key points to take from the statement are listed below.

  • The RBNZ is now more concerned about the global economy, describing the global economic growth as “below average” compared to “moderate used in September”. It also notes that concerns around slower growth in China and east Asia “remain”.
  • The board is more optimistic towards recent developments in the domestic economy, describing growth in the services sector and construction as “robust”. In September, economic activity had slowed due to the “plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence.”
  • The RBNZ remain concerned about heat in the Auckland residential property market, describing it as “strong” compared to “rapid” in September. They will monitor developments in the market as a result of changes to investor lending criteria that will begin on November 1.
  • The board remain concerned about the level of the New Zealand dollar, stating that the recent rally may dampen economic activity and inflation that will “require a lower interest rate path than would otherwise be the case.” In September they stated that “further depreciation is appropriate.”
  • The RBNZ’s forward guidance is unchanged, noting that “some further reduction in the OCR seems likely”, the same language used in September.

The statement is a mixed bag with more dovish language towards the global economy offset by an improved outlook for domestic economic conditions. The is also a general perception that that the board’s language towards the recent rally in the New Zealand dollar could have been stronger than what was communicated in the statement.

As a result, the New Zealand dollar is now recovering ground lost overnight as a result of the US FOMC monetary policy statement keeping the door open to the prospect of an US interest rate hike later this year.

The NZD/USD currently buys .6708, well above the session low of .6627 struck immediately after the RBNZ policy statement was released.

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