RBNZ monetary policy: Assessing the bias

Reserve Bank of New Zealand (RBNZ) announced monetary policy last night and kept its key overnight cash rate unchanged at 2.25%.

Let’s look at the policy statement details to assess the bias –

• According to RBNZ policymakers, global growth has deteriorated, due to China and emerging markets. Considers it as threat to domestic economy. (Dovish)
• It notes recent rise in commodity prices but still consider them to be weak. Dairy prices recovered still below break-even. Considers it as threat to domestic economy. (Dovish)
• Considers monetary policy across world extremely accommodative and financial market volatility has eased. (Neutral)
• Domestic growth being supported by migration, construction, tourism and monetary policy. (Neutral)
• House price in Auckland excessive and pressure is building in other regions. Feels supply required. Considers it as threat to domestic stability.(Mild Hawkish)
• Headline inflation low but core within range. Longer term expectations well anchored, but short term expectations dipped. Expects inflation to strengthen, due to lesser impact of low oil price and higher capacity pressure. (Mild Hawkish)
• RBNZ feels, further cut necessary to facilitate inflation to settle close to the middle of target range. (Very Dovish)
• The bank feels exchange rate higher than appropriate. (Dovish).

With most of the statements in the policy leaning towards dovish, we expect further 25 basis points reduction in OCR by third quarter this year.

Kiwi gained after both FED and RBNZ kept rates on hold. Currently trading at 0.695 against Dollar.