On what has been a quiet data week, New Zealand, in an somewhat uncustomary role, has been the talk of financial markets in recent days, particularly the New Zealand dollar.
Following an announcement from the Reserve Bank of New Zealand (RBNZ) last week that it would release an intra-meeting economic assessment on July 21, along with the news on Tuesday that the bank had tightened macroprudential measures towards residential property in an attempt to cool Auckland’s red-hot housing market, the New Zealand dollar has been smoked, falling 4% as traders priced in the likelihood that the bank will cut interest rates when it next meets on August 11.
To Annette Beacher, TD Securities’ chief Asia-Pacific macro strategist, the sudden and abrupt policy announcements from the RBNZ have been “clumsy”, with Thursday’s economic update threatening to further cloud what the bank intends to do when it comes to the outlook for monetary policy.
After all this policy noise in recent weeks, tomorrow’s Economic Assessment may just add to the noise rather than clarify the Bank’s decision. We expect a one-page OCR Review style update, ending with an easing bias, but no-one seems to know the format for sure.
Recent market volatility would not be welcomed by the Bank, since one of its Policy Target Agreement (PTA) mandates is to “seek to avoid unnecessary instability in output, interest rates and the exchange rate”. We suspect these recent clumsy attempts at enhancing forward guidance has unintentionally made their policy dilemma (hot housing vs overvalued exchange rate) even more problematic amongst such whippy price action in recent weeks.
Given no one really knows what the RBNZ will deliver, and with markets 80% priced for the bank to cut the official cash rate to 2% in August, Beacher suggests that market chaos could ensue should the assessment not hint that a rate cut is likely.
“We foresee market chaos and confusion (and dare we say even further erosion of RBNZ forward guidance credibility) if Governor Wheeler didn’t hint at a rate cut in tomorrow’s Economic Assessment, and follow up with a -25bp rate cut to 2% on 11 August,” says Beacher.
She also cautions that the decision from the RBNZ to tighten macroprudential measures on property investment does not automatically imply that a rate cut is coming.
“There is a widespread perception that because the RBNZ cut the official cash rate (OCR) ahead of the start date of the 2015 macropru tools, that history appears doomed to repeat itself for a cut on 11 August, ahead of the 1 September implementation of the latest set of restrictions,” she says.
“That may well be the case (and is reflected in market pricing). However, we also highlight that when macropru tools were first introduced, the RBNZ followed up with a swift +100bp tightening cycle.”
The RBNZ will release its updated economic assessment on Thursday, July 21 at 9am in Wellington (7am AEST). One way or another, it appears that volatility will be a given.
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