Today’s Reserve Bank of New Zealand (RBNZ) monetary policy decision looks set to be a humdinger, much like the Reserve Bank of Australia one month earlier, with economists, and to a lesser degree markets, split as to whether New Zealand will reduce interest rates to fresh record low of just 2.0%.
In reality the decision will come down to what the RBNZ wants less – strength in the New Zealand dollar or even further strength in Auckland’s red hot housing market, the largest and most expensive in the country.
To Morgan Stanley’s Global FX stratgey team, led by Hans Redeker, the risks of the RBNZ rate cut todayare “high”.
“The RBNZ is one of a few central banks that can actually weaken its currency via rate cuts as it has a fairly steep yield curve and the highest starting monetary policy rate. We think the risks are high for a cut this week and if not now then pre-announcing a cut at the August meeting,” says Redeker.
“Inflation expectations have fallen to lows last seen in the 1990s and the NZD TWI [trade-weighted index] is trading 4.8% above the RBNZ’s September forecast.”
While some expect that the RBNZ will hold off easing on this occasion, citing the risk that lower interest rates risk fuelling Auckland property prices even further, Redeker points out that this can be easily addressed by tightening macroprudential policy over housing, allowing the bank to cut rates, place downward pressure on the New Zealand dollar and assist the nation’s struggling dairy industry.
“The main opposition comes from the fact that house prices are rising rapidly as a result of migration (6.5% YY nationally), which cutting rates could spur further, adding to household debt,” he says.
“We would expect macro-prudential policy to ease the financial stability risks, but what is more worrying to us is the continued negative cash flows in the dairy industry. Lower interest rates could help to ease the burden on this sector.”
Like Morgan Stanley, Annette Beacher, TD Securities’ Singapore-based chief Asia Pacific macro strategist, believes that the RBNZ will follow through on the easing bias communicated in its April policy statement, cutting the official cash rate to 2%.
“The governor’s 2% inflation target remains elusive given soft wages growth and a stronger currency than that expected three months ago,” says Beacher. “In our view this provides ample scope for the Bank to ‘shock’ the exchange rate back into a lower trajectory with a cut, easing bias and a lower bank bill profile.”
“The RBNZ is an inflation-targeting bank, and the case to cut rests on ongoing low inflation,” she says.
Beacher outlines why the bank needs to be proactive, rather than reactive, on this occasion.
“If the RBNZ pauses at 2.25% and isn’t ‘dovish enough’ the NZD could easily jump through $US0.70 and retest the May high of $US0.705,” she says.
“The (US) Federal Reserve is not expected to hike this month, so ‘waiting’ for a USD boost may again be futile, so best that the RBNZ be more proactive in boosting inflation with a cut.”
For anyone who’s traded RBNZ rate decisions before, it’s likely that you’re familiar with the volatility in the currency that Beacher talks about.
Gains or losses of one per cent plus are more common than not in the immediate aftermath of the decision, and today’s announcement will be no exception.
In a survey of 15 economists polled by Bloomberg, eight expect that the cash rate will be reduced to 2.0%.
Perhaps buttressing the view as to why the RBNZ could go early, by the time the bank next meets in August, every economist polled expects that the cash rate will be lower.
If it’s going to go why not go early, right?
Markets will find out the answer to that question soon enough. The decision, along with the accompanying monetary policy statement, will be released at 9am in Wellington (7am AEST).
Business Insider will have full coverage as soon as the decision drops.