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In the view of the Barclays analysts, the Reserve Bank of New Zealand (RBNZ) is likely to disappoint the hawks by hinting towards a looser monetary policy next week.

Key Quotes:

“We think the argument for looser policy is building and the RBNZ may struggle to maintain its neutral policy tone at its 27 March meeting, encouraging markets to price further easing and sell NZD before then.  

The output gap likely became negative in H2 18 and headline (1.9% y/y) and core inflation (1.7%) sit below the 2% midpoint of the RBNZ’s 1-3% inflation target band.  

We are skeptical of the RBNZ’s view that New Zealand activity will pick up sufficiently (i.e., to 3% y/y) such that an increasingly positive output gap offsets concern that falling headline inflation (likely to bottom at 1.2% y/y in Q3) will lower already-subdued inflation expectations (one-year ahead expectations were 1.8% y/y in Q1).”