The Reserve Bank of New Zealand left as expected the key rate at 1.75% and changed its tone to an easing bias. According to the NAB FX Strategy Team, the central bank could cut rates as soon as May but the evidence is still not sufficient.
Key Quotes:
“It is really interesting that the Bank has said nothing to indicate that it has changed its views on employment being “near its maximum sustainable level” and the fact that “consumer price inflation is expected to rise to around the mid-point of the target range at 2 percent”. We have consistently stated that the RBNZ would run policy strictly within the constructs of these targets. We are starting to question our belief in that.”
“We too understand that the central view for the international environment has deteriorated, albeit that tail risks seem to have reduced. But, at this stage, there is minimal evidence that this is having a detrimental impact on the New Zealand economy.”
“The other justification for the Bank’s concern was “reduced momentum in domestic spending”. This is interesting because private consumption is proving to be stronger than the RBNZ had forecast. The real weakness, if there is any, appears to be in investment.”
“The NZD has slumped about a cent on the back of today’s release and interest rates have fallen aggressively across the curve. A full rate cut is now almost fully-priced by August with a second rate cut given a real chance. We should point out that mortgage rates had already moved around 25 points lower in advance of this OCR review. One assumes there is now more reduction in the offing.”
“We really can’t believe that we are saying this but a May rate cut is now very much alive.”
“We remain of the view that a tightening bias would be a much better stance for the RBNZ to take but there is no point in trying to pretend that a clearly dovish central bank has any intention of moving in this direction barring a major shock.”
“We do not believe the evidence will be sufficient to actually cut rates in May so unless we see weakness in the labour market or falling inflation we will rail against that view albeit ever mindful that we do not see the justification for the Bank’s current stance either.”
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