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21 Mar 2016
NZD: Further RBNC cut seems very likely by mid-year – Deutsche Bank
Research Team at Deutsche Bank, notes that the RBNZ announced on 10 March that it has decided to reduce the OCR by 25bps to 2.25%, against the expectations of the vast majority of commentators (ourselves included).
Key Quotes
“The RBNZ’s projections assume one further 25bp cut in the OCR at a coming meeting. This has caused a substantial rally across the interest rate curve (2-year swap falling 18bps) and a little-over 2% depreciation of the trade-weighted exchange rate.
Whilst in aggregate the economy is doing reasonably well (and the RBNZ’s projections point to continued above-trend growth), the Bank seems to have lost patience with defending its previous stance in light of persistent low inflation and a persistently higher-than-desired exchange rate. A recent fall in survey measures of inflation expectations and a perceived weaker global growth outlook has also played into the decision.
At this point we are not convinced that today’s reduction in the OCR is in the best long interest of the New Zealand economy, but reasonable people can disagree and time will tell. However, we have little doubt that the RBNZ intends to cut the OCR again by mid-year – possibly as soon as the 28 April meeting, but most likely at the 9 June meeting. The timing will depend on the flow of news both in New Zealand and abroad. We think it is unlikely that the OCR will remain at 2% through to 2019 as the RBNZ now projects.”
Key Quotes
“The RBNZ’s projections assume one further 25bp cut in the OCR at a coming meeting. This has caused a substantial rally across the interest rate curve (2-year swap falling 18bps) and a little-over 2% depreciation of the trade-weighted exchange rate.
Whilst in aggregate the economy is doing reasonably well (and the RBNZ’s projections point to continued above-trend growth), the Bank seems to have lost patience with defending its previous stance in light of persistent low inflation and a persistently higher-than-desired exchange rate. A recent fall in survey measures of inflation expectations and a perceived weaker global growth outlook has also played into the decision.
At this point we are not convinced that today’s reduction in the OCR is in the best long interest of the New Zealand economy, but reasonable people can disagree and time will tell. However, we have little doubt that the RBNZ intends to cut the OCR again by mid-year – possibly as soon as the 28 April meeting, but most likely at the 9 June meeting. The timing will depend on the flow of news both in New Zealand and abroad. We think it is unlikely that the OCR will remain at 2% through to 2019 as the RBNZ now projects.”