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Reserve Bank of New Zealand (RBNZ) interest rate decision this week, due on April 27th at 21 GMT, will be the highlight as the central bank is facing an increasingly nuanced balancing act between its monetary policy and macroprudential aims. The housing market has picked up and developments over the past few weeks have generally been inflation positive. However, NZD continues to defy gravity and mortgage rates have not fallen as far as expected following March’s OCR cut.
The RBNZ’s commentary is likely to acknowledge the balance of recent developments and to provide a firmer easing signal – perhaps the RBNZ will describe further easing as “likely in the coming months”, to keep markets focused on falling interest rates. Ahead of the policy meeting, the New Zealand Institute of Economic Research (NZIER) Monetary Policy "Shadow Board" also recommends the RBNZ to hold rates unchanged this meeting.
"We expect that the RBNZ will keep the OCR at the current record low of 2.25%, but that the accompanying policy statement will strengthen the easing bias the RBNZ espoused in March." said Westpac Research in a report.
New Zealand household debt has risen to levels equivalent to 162% of their annual disposable incomes, higher than the peaks reached prior to the financial crisis. Eventual repayment of debt will be a drag on growth and makes the economy more vulnerable to unfavourable developments including possible future increases in interest rates. The RBNZ is thus faced with a delicate balancing act between its monetary policy and macroprudential aims.
In terms of monetary policy, the RBNZ is bound to keep the OCR at low levels due to the weakness in inflation. The continued strength in the NZD will tend to suppress inflation. However, this will inevitably lead to higher asset prices and debt levels. Consequently, there is little scope for any easing in macroprudential settings anytime soon. In fact, there is a risk that we could see some tightening in macroprudential settings in coming years.
The market currently assigns only a 30% chance of a cut on Thursday. It’s hard to see how a further rate cut could substantially influence the direction of the NZD (December and March cuts certainly didn’t) amidst actions of other central banks." The Kiwi is gaining strength as we head into the RBNZ policy meet, up 0.45 pct against the US dollar at 0.6885 at 1030 GMT.
