The Reserve Bank of New Zealand left the interest rate unchanged at 2.25% and softened the wording about the strength of the kiwi. This in turn led to further strength of the kiwi, with NZD/USD shooting much higher to 0.7140.
Is this move real? It seems that the weakness of the US dollar (thanks to a the terrible NFP among other things) contributes to the move. Here are opinions from two banks:
Here is their view, courtesy of eFXnews:
RBNZ: Opening The Way For A Cut In August Meeting – Nomura
As expected, the RBNZ kept its policy rate unchanged at 2.25% and maintained its dovish policy bias, stating that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.
Today’s decision suggests that the central bank is currently more concerned about the financial stability risks than the weakness in inflation. Moreover, it continues to suggest that the RBNZ is likely to cut rates in the near future because of the weakness in inflation. In addition, since there are some expectations that a weakening of the NZD would help inflation return to target, further strength in the currency would raise the likelihood of further rate cuts.
With all this in mind, we think it looks very likely that the RBNZ will cut rates this year, depending on inflation, house prices and exchange rate developments, but the RBNZ would rather wait to have the Q2 CPI report (to be released on 17 July) before taking a decision, opening the door to a cut at the 11 August meeting.
RBNZ Playing A Game Of NZD Chicken; Fade Initial Knee-Jerk Reaction – ANZ
The OCR was maintained at 2.25% as expected (although far from universally). And while an easing bias was retained (“further policy easing may be required”) and the 90 day bank bill projection is still downwardly sloped (largely unchanged from March), the tone of the statement was slightly less dovish than previous – quite rightly in our view. But also with a hook; they don’t want the currency to respond too far and it could (is likely) to bring them back to the table.
The door is still open to a rate cut – on currency strength more than anything. In fact the high NZD / OCR downside scenario (to sub 1%) has the NZD trading below where it is today! That hints of MCI style thinking!
We see the odds of a cut in August at just over 50%. The economy doesn’t need stimulus anytime soon. The combination of global wobbles (we expect some and it will be influential at the RBNZ), NZD strength, and pressure on local rates from higher funding costs are powerful forces bringing the RBNZ to the table again down the track. But that’s tomorrow’s story.
However, with the currency still playing a role in upcoming deliberations, there’s a limit to how high the NZD can go, and we favour fading the initial knee-jerk reaction higher. In that regard we note that the Bank’s downside scenario (which takes the 90 day bill rate below 1%, pointing to an OCR at 0.75%) is associated with the TWI holding steady, rather than rising, suggesting the currency hurdle to easing is not overly high (especially if housing can be cooled via macroprudential policy). In other words, we’re back to MCI trading.
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