RBNZ to cut reluctantly – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that in New Zealand, there is a virtually unanimous agreement by forecasters that the RBNZ will cut rates this week on Thursday morning. 

Key Quotes

“The rates market is pricing in 19.5bp of cuts, about a 78% probability of a 25bp cut to 1.75%.

However, analysts are also largely in agreement that this will be the last cut in the cycle for New Zealand, and the rates market pricing has no more than 23bp of cuts priced in from here.  As such, the market should not be surprised if the RBNZ move to a neutral bias after one more rate cut this week. However, many will be still looking for a mild easing bias as part of an attempt to keep a lid on the NZD exchange rate.

The recent economic activity and inflation data do not make a case for further easing at this time.  As such, there is a risk that the RBNZ decides not to cut further this week.  However, they have strongly signaled that a further rate cut is expected.  In recent meetings, it has said, “Our current projections and assumptions indicate that further policy easing will be required”.  As such, the market thinks it has painted itself into a corner.

A key concern of the RBNZ has been the strength of the NZD exchange rate. As such, the RBNZ may fear a surge in the NZD if it does not follow through with its predicted rate cut.  However, the most recent inflation data, trends towards higher commodity prices and recent evidence of some lift in global inflation expectations suggests that the case for a further cut this week has diminished.

We think that the recent improvement in the inflation outlook has not been so large to prevent the RBNZ from cutting rates this week, and we expect them to follow through, but the tone of their policy statement is likely to be neutral.  We think they will remove any comment in their opening statement that says rates are likely to, or even, may need to be cut further.

The risk is then that the NZD firms in the wake of the statement.  However, NZD is already relatedly strong against other commodity currencies and the USD is likely to receive some boost from a Clinton victory.  As such, we are not expecting a significant uplift in NZD/USD, but can see significant gains against the JPY.”