RBNZ on hold, but further easing required – Nomura

Research Team at Nomura, notes that as per their expectations, the RBNZ left its policy rate on hold at 2.00% while keeping its easing bias, noting that its “current projections and assumptions indicate that that further policy easing will be required to ensure that future inflation settles near the middle of the target range.”

Key Quotes

“It also expressed the view that NZD needs to depreciate, as it has had a negative impact on exports and inflation. Overall, nothing in this meeting changes our fundamental view that the RBNZ is likely to cut its policy rate at the November.

Once again, the RBNZ communicated a weak outlook on the external front, highlighting that global growth continues to evolve below trend despite being supported by unprecedented levels of monetary stimulus. Consistent with its comments last month, it reiterated that global political uncertainty remained and that “the prospects for global growth and commodity prices remain uncertain.”

On the domestic economy, the Bank continues to point toward the elevated level of the currency, which may be culminating as a result of “weak global conditions and low interest rates relative to New Zealand.” Although the Bank highlighted that 2Q GDP results were in line with its expectations and domestic growth remains supported by strong net immigration, construction activity, tourism, and accommodative monetary policy, the outlook for dairy prices remains uncertain, despite having firmed since early August.

The RBNZ reiterated its concerns about excessive house price pressures, although “the recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderate influence.” We continue to believe that the introduction of these new measures affords the Bank more leeway in seriously considering more rate cuts before year-end to respond to adverse pressures in other sectors of the economy.

The central bank expects inflation to rise starting in the December on the back of the base effect coming from energy prices. However, it remains concerned that current low inflation could feed into long-term inflation expectations.

As expected, the Bank continues to sound concerned around the strength of the NZD, as it continues to pressure the export- and import-competing sectors and causing deflationary pressures in the tradable sector. Very explicitly, the Bank noted that “a decline in the exchange rate is needed.”

Overall, we think the meeting provides little new information and, thus, retain our forecast of a 25bps rate cut in November.”