RBNZ monetary policy: Assessing future bias

Reserve bank of New Zealand (RBNZ) reduced the interest rate by 25 basis points last night to 1.75 percent.

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

• Despite an improvement in some countries, surplus capacity exists in the global market. Inflation remains weak despite a recovery in commodity prices. Market volatility and political uncertainty remain elevated. ( Dovish bias)
• Domestic growth 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 for the stability of the financial system. (neutral to mild hawkish bias)
• Headline inflation is below target band and due to lower fuel price and cuts in levies but RBNZ expects inflation to rise from the December quarter as a result if strong domestic growth and policy measures taken so far. (Neutral bias)
• Monetary policy will remain accommodative. Current measures will lead to growth strong enough to have inflation settle near the middle of the target range. (Mild hawkish bias)
• Uncertainties remain especially in international outlook, and policy may need to adjust accordingly.

Compared to the previous statement, this one is mild hawkish, which isn’t unnatural given today’s easing. RBNZ is likely to sit on the easing done so far and monitor the outcome.

So, we expect RBNZ to cut rates again once before the second quarter of 2017. However, a lot would depend on inflation.

Based on the previous statement, a rate cut was well expected, hence there wasn’t much downside in the New Zealand dollar, which is currently trading at 0.725 against the dollar.