RBNZ: Refused to be Trumped - BNZ

Stephen Toplis, Head of Research at BNZ, notes that the RBNZ delivered a hawkish cut yesterday as anticipated, and the cash rate was lowered to 1.75% from 2.00% but this was accompanied by a strong acknowledgement that further cuts are unlikely to be necessary.

Key Quotes

“That said, the door has still been left ajar to further reduction with the Bank intimating a 20 to 25% potential for a further move lower.”

“It seems to us that the RBNZ is finally voicing the fact that the economy is growing sufficiently strongly to not warrant any further increase in stimulus despite CPI inflation remaining low for a significant period of time. Indeed, annual CPI inflation is not forecast to reach the mid-point of the RBNZ’s target band until December 2018. Importantly, the Bank specifically confirms that it is “flexible in its inflation targeting approach.”

“The projected path for the OCR is one that supports strong but steady growth in the economy and provides for a gradual increase of inflation towards the target midpoint. More aggressive policy easing to drive inflation to the midpoint of the target range much sooner risks generating unnecessary volatility in output, interest rates and the exchange rate.”

“The Bank restated the key factors that most likely would cause it to change its view. In short they are:

– A higher New Zealand dollar, higher funding costs, lower export prices, weaker commodities and lower inflation expectations, which would result in the need for further stimulus;

– Higher net migration, stronger house price inflation and stronger consumption, which would need less stimulus.”