RBNZ: OCR on hold, signalled that rate cut is coming in November - Westpac

Imre Speizer, Research Analyst at Westpac, notes that the RBNZ’s Monetary Policy Statement (MPS) this morning kept the OCR on hold at 2.0% and retained its explicit easing bias, signalling a rate cut in November.

Key Quotes

“The policy guidance paragraph: “Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data.” was a repeat of August’s: “Monetary policy will continue to be accommodative.  Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.  We will continue to watch closely the emerging economic data.” Noteworthy was the retention of the word “will”, as explicit as the central bank can be. Markets had harboured some concerns that the guidance would be softened.

The NZD exchange rate narrative was also a repeat of August’s, reading: “Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate. The trade-weighted exchange rate is higher than assumed in the August Statement. Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector. A decline in the exchange rate is needed.”

Markets have so far interpreted the outcome as a mild dovish surprise. That is because the stream of good NZ economic news over the past month had caused a hawkish reassessment of market pricing.

NZD/USD thus slipped from 0.7360 to 0.7325. We expect it to settle above 0.7300.  AUD/NZD nudged from 1.0360 to 1.0370, and could extend to 1.0400 during the day ahead.

OIS pricing for a November cut rose from a 58% chance to 70%. 2yr swap rates have fallen 4bp from 2.08% to 2.04%%, and test 2.00% during the days ahead as fresh received positions are established.  The 10yr has fallen from 2.59% to 2.56%, leaving the 2-10yr curve little changed at 52bp. Combined with earlier BoJ and FOMC effects, we expect further steepening towards 60bp.”