RBNZ has so much to gain, and everything to lose

Next week the Reserve Bank of New Zealand will hold its June monetary policy meeting, something analysts at CBA describe as the “most eagerly anticipated (policy decision) since the RBNZ started tightening early last year.

Going into the meeting, markets are evenly divided on whether or not the RNBZ will cut interest rates. Whichever way the RBNZ goes, CBA believe “the reaction, either way, will be violent.”

While the markets are divided, CBA believes the bank has “a perfect opportunity to deliver economic insurance and a lower currency, with one stroke of the pen”.

The CBA is forecasting at least two 0.25% cuts from the RBNZ, partly on the back of tighter macroprudential regulations governing Auckland’s property market.

“The balance of risks around New Zealand’s economic (and inflation) outlook suggests the RBNZ can (and will almost certainly) cut rates. All eyes are now on RBNZ Governor, Graeme Wheeler. We have long advocated RBNZ rate cuts, as inflation continues to surprise on the downside and international developments allow for caution. We are of the view the RBNZ will cut 50bps in this cycle, but may be forced to cut 100bps if conditions deteriorate. The main resistance to rate cuts has come from the strength, and financial stability threats, emanating from the heated Auckland housing market. The RBNZ is dealing with the housing related threats via macro-prudential policy. Monetary policy can now be used to offer support elsewhere in the economy, and guard against a disinflationary mindset creeping into price-setting behaviour”.

Whether the bank decides to cut rates next week or in July, something that is fully priced into markets, CBA believes both the Kiwi Dollar and interest rates will be heading lower.

“We have long advocated received positions in Kiwi rates, and short positions in NZD/USD. We hold these positions into next week. We believe a spike higher in rates and the currency following an “hold on” decision would ultimately prove temporary. And may present an opportunity for market pundits to re-engage long rates and short NZD currency positions”.

The Reserve Bank of New Zealand will announce its June monetary policy decision on June 11 at 7am Sydney time.

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