RBNZ keeps OCR unchanged at 2 pct, likely to cut by 25bp in November

As widely expected, the Reserve Bank of New Zealand kept the OCR unchanged during its meeting today. The OCR was kept on hold at 2 percent, but the central bank retained a clear easing bias. It gave a balanced and measured and largely unchanged statement. Much of language from its policy assessment was repeated from its statement in August.

The RBNZ reiterated that its current projections and assumptions show that further policy easing might be needed to guarantee that inflation settles close to the middle of the target rate. This clearly indicates that a rate cut in November is quite likely, said ANZ in a research note.

The factors determining the outlook of monetary policy are the same from what the central bank had hinted already. Fragilities in the global economy remain, dampening inflation pressures, strong NZD, the domestic economy is performing well, housing continues to be a financial stability concern, and while inflation is likely to accelerate, low inflation expectations continue to be risk and a concern.

One change that was noted was a dropped reference to the NZD making it tough for the central bank to meet its inflation target. It is quite difficult to make out what that means.

The RBNZ would continue to operate in an environment full of tension. “Traditional” policy signals, such as capacity, growth, housing, labor market etc, are arguing for no further stimulus, but are going head to head with the likes of strong New Zealand dollar, low inflation and weak global economy – the factors that argue for additional stimulus, noted ANZ.

The New Zealand central bank has hinted that it would be taking a calculated approach to tackle the tension, and the statement made during its meeting today is in line with that. The RBNZ neither is unlikely to take policy sharply lower nor is it expected to do nothing.

It is a situation where the OCR is biased lower as the central bank makes an effort to react to the things it cannot control by over-stimulating the things it can, according to ANZ. The RBNZ is still expected to lower its OCR in November and February, added ANZ.

Affirmation that “further policy easing will be required” will soothe a market that had become uncertain regarding the RBNZ’s desire to continue easing, and is the most solid hat-tip to a cut in November the market could ask for.

“We expect the short end and forward rates to resume grinding lower from here, and for geographic bond spreads (which have under-performed badly) to narrow in gradually over coming weeks, assisted by index duration extensions due at the end of the month”, stated ANZ.