RBNZ cut 25bps : recap of the event and analysis of the outcome - Westpac

Analysts at Westpac noted that the RBNZ’s Monetary Policy Statement (MPS) this morning reduced the OCR by 25bp to 2.0% and retained a strong easing bias, signalling one more cut to come.

Key Quotes:

"That signal was given both textually and via the RBNZ’s interest rate projection.

The 90-day interest rate projection fell from 2.12% to 1.75% at the two-year ahead point. That is consistent with a projection that the OCR’s terminal rate during this easing cycle will be either 1.5% or 1.75%.

The policy guidance paragraph stated: “Monetary policy will continue to be accommodative.  Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.  We will continue to watch closely the emerging economic data.”., almost identical to the guidance from the 21 July interim economic update : “Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.  We will continue to watch closely the emerging economic data.” This is strong dovish guidance, wording in bold suggests the next meeting in September is live.

The NZD exchange rate narrative was similar to that on the 21 July: “Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.  The trade-weighted exchange rate is significantly higher than assumed in the JuneStatement. The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector.  This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.”

Markets appear to have expected even more than was priced in by swap markets. NZD/USD thus rose from 0.7205 to 0.7341 (but back at 0.7285 as we write) – a surprisingly large response given the outcome was in line with priced expectations. We would expect the NZD to settle around 0.7250 once the initial froth has subsided.  AUD/NZD fell from 1.0680 to 1.0550, but should find support around 1.0500.

2yr swap rates rose 6bp from 1.98% to 2.04%, and could rise further towards 2.10% as positions are cleared.  The 10yr only rose slightly from 2.41% to 2.44%, leaving the 2-10yr curve flatter at 40bp. We expect the curve to flatten during the week ahead."