RBNZ: A credible pause at 2% - TDS

Research Team at TDS, notes that the RBNZ left the cash rate at 2% and repeated its August explicit easing bias of “… further policy easing will be required to ensure that future inflation settles near the middle of the target range”.

Key Quotes

“This combination was widely expected, and the markets seem to have taken the RBNZ pause at 2% in stride. Perhaps after a lot of noise from the Bank of Japan and the FOMC in the last twelve hours it would have taken a real surprise to generate any material impact on rates or FX.

“A decline in the exchange rate is needed” is a repeat of the 21 July Economic Assessment and the 11 August Monetary Policy Statement (MPS) and so is not jawboning. The Governor chose not to express the view that the exchange rate is “unjustified” and/or “unsustainable”, two words closely associated with imminent currency intervention. The last time the RBNZ formally intervened was when the NZD reached $US0.88 in July 2014.

Today’s policy statement was a near-repeat of August, although we note the inclusion of “There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence”. This clearly paves the way for further easing.

The RBNZ remains embedded in a gentle but prolonged easing cycle (chart below). The August 11 MPS bank bill projections (i.e. OCR forward guidance) were slashed by -37bps, allowing for at least one more 25bp cut, depending on the ‘emerging’ data and exchange rate.

We remain with our base case of -25bp to 1.75% in November. OIS pricing for November jumped from 60% before this announcement to around 70% now. The first full cut is priced for February 2017.”