Flash Notes:RBNZ Stays Pat But Keeps To Easing Bias

Earlier this morning, the Reserve Bank of New Zealand (RBNZ) left rates unchanged at 2.25%.

    However, it maintained a clear easing bias, expressed identically to that in the statement accompanying the April OCR review in that“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We willcontinue to watch closely the emerging flow of economic data”.

    The New Zealand dollar is clearly a focus, with the currency described as ‘higher than appropriate’ and given much of the blame forweak inflation. Indeed, the RBNZ’s task of getting inflation back to 2% has been made increasingly difficult by the recent rise in theNZD. Since the bank last cut rates in March, the Trade Weighed Index (TWI) has risen almost 3%, to sit almost 6% higher than wherethe RBNZ predicted it would be by the second quarter. A large part of the currency’s strength comes down to the US dollar’s recentbout of weakness, amid growing expectations the Fed will hold off further policy tightening.

    Yet, the RBNZ’s decision to delay further policy easing comes amid a wave of fresh indications that the New Zealand’s housing marketcontinues to overheat. RBNZ Governor Graeme Wheeler highlighted that ‘House price inflation in Auckland and other regions is addingto financial stability concerns. Auckland house prices in particular are at very high levels, and additional housing supply is needed’.

    The RBNZ’s central projection for real activity envisages slightly stronger economic growth over the near-term (3.4% y/y in the yearto 1Q17), and lower growth thereafter with the Bank factoring a slightly firmer profile for the trade-weighted exchange. The Bank’snear-term forecast for CPI inflation have also been raised modestly to 1.5% y/y for 1Q17 (from 1.3% y/y previously), but are littlechanged (at around 2% y/y) thereafter.

    As far as our RBNZ view is concerned, we are still keeping to our call for one more 25bps rate cut ahead. We had previously highlightedthat today’s decision was a close call. But with the next meeting on 11 August a full MPS meeting (there is no meeting in July), holdingoff in June would also mean that RBNZ could assess a slew of data, including the Q1 GDP (16 June), Q2 CPI (18 July) and Q2 labourmarket reports (3 August).

    On NZD/USD, we had turned bullish earlier this week with an immediate target of 0.7000 (see “FX Insights” on 6 June 2016). However,NZD has surged to highs of 0.7139 following the RBNZ’s announcement this morning. Further out, whilst an extended up-move towards0.7190 would not be surprising, short-term indicators are at extreme levels. That said, unless the 0.7030-support is taken out, theoutlook for NZD remains positive.