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Dominick Stephens, chief economist at Westpac, notes that the Reserve Bank of New Zealand today left the OCR on hold at 1.00%, saying that “Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time.”

Key Quotes

“The RBNZ gave no explicit signal of cuts to come, although it does remain open to the possibility of cuts if required. The OCR track was the same as August, troughing at 0.9%. This implies a 50/50 chance of an OCR cut at some point. Similarly, the RBNZ said “We will add further monetary stimulus if needed.”

“The decision not to cut the OCR was a big surprise to financial markets, as financial market pricing indicated an 80% chance of a cut and most economists were forecasting a cut.”

“The RBNZ appears to be pausing to assess how the stimulus delivered to date will affect the economy. The RBNZ acknowledged that the economy is currently weak, but they also acknowledged that commodity prices have been robust, the exchange rate is low, and low interest rates will support spending and investment going forward. The RBNZ did not pay great heed to the drop in inflation expectations in yesterday’s survey, perhaps because market-based measures of inflation expectations have risen.”

“In response to today’s announcement, pricing for mid-2020 has shifted to a 40% chance of a cut. In other reactions, 2yr swap rates rose 18bp from 1.04% to 1.22%, 10yr swap rates rose 13bp from 1.54% to 1.67%, NZD/USD rose from 0.6335 to 0.6417, and AUD/NZD fell from 1.0800 to 1.0683.”