RBNZ Monetary Policy: Assessing future bias

Reserve bank of New Zealand (RBNZ) kept the policy rate at 2 percent in last night’s meeting and the New Zealand dollar didn’t move much as the move was widely expected.

Let’s see in the monetary policy, how the bias stands for future actions,

• Volatility in the financial markets increased, especially in bonds and equities. RBNZ notes that global growth is below average and inflation is low, despite highly stimulatory monetary policies. Uncertainties remain in politics as well as for commodity prices. ( Dovish bias)
• Second quarter GDP result in line with expectations; Domestic activity supported by immigration, construction, tourism and accommodative monetary policies. Dairy export prices recovered but uncertainty persists. (Neutral bias).
• Kiwi is higher than appropriate. Weak global conditions and lower rates relative to New Zealand are pressuring kiwi upwards. A decline in exchange rate is required. (Dovish/Weaker Kiwi bias)
• House price inflation excessive, posing concerns. Recent macro-prudential measures are having some influence. (neutral to mild hawkish)
• Uncertainty in outlook which relates to global growth and commodity prices. Domestic concerns are high net migration, housing prices and lower inflation expectations. (Mild Dovish)
• Headline inflation is below target band and due to lower fuel price and cuts in levies but long term inflation expectations well anchored at 2 percent. (Neutral bias)
• RBNZ expects inflation to rise from December, reflecting the policy stimulus. (Mild hawkish bias)
• Further easing would be necessary. (Dovish bias)

Compared to the previous statement, this one is much more dovish, especially the stressing on further easing and the exchange rate.

So, with such explicit indications, RBNZ is likely to ease at least once and possibly twice, within the first quarter of next year.