NZ: Monetary policy remains clearly on hold - BNZ

Jason Wong, Senior Market Strategist at BNZ, suggests that monetary policy remains clearly on hold in NZ, the only question is for how much longer.

Key Quotes

“According to market pricing, any hike remains a distant prospect (over a year away) and according to the RBNZ, the first rate hike for the cycle will be even further away. One just needs to bear this in mind when reading through this Thursday’s Monetary Policy Statement. Throw in two changes in leadership at the RBNZ by March 2018 and the (mediumterm) forward guidance by the RBNZ will need to be taken with a smaller grain of salt than usual.”

“We expect the key final paragraph in the press statement to remain unchanged. “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly”. The underlying message will be that the RBNZ is in no hurry to join some other major central banks in looking to remove policy accommodation. In fact, we expect inflation forecasts to be reduced a little, reflecting the strength of the NZD more than offsetting any possible inflationary impulse from stronger terms of trade and the lower starting point for the forecasts given the downside surprise to Q2 CPI.”

“At the margin, the tone of the Statement and Governor Wheeler’s press conference could come across as slightly more dovish than the May Statement. But this shouldn’t surprise the market, with some anticipation of that tone leading up to the Statement. This has led the market to push out the first full tightening to September 2018, while the 2-year swap rate is trading at the bottom end of its range this year. It’s hard to argue with market pricing and we expect the RBNZ’s tone to support current (low) shortend rates. We see the post MPS reaction for rates as slightly skewed to the downside, with more chance of a dovish than hawkish surprise. But the Bank is likely to be fairly content with market pricing at this juncture, which has seen market pricing for hikes pushed out into the distant future.”