RBNZ has clearly laid the groundwork for a rate cut – RBS

James Nelligan, Research Analyst at RBS, suggests that the RBNZ has clearly laid the groundwork for a rate cut at the 10th August policy meeting, by stressing the need to push inflation towards the central bank’s 1-3% target at an inter-meeting policy update recently.

Key Quotes

“CPI is running at 0.4%, two year inflation expectations are close to record lows and we think the effect of the global output gap on that data is understated. Elevated housing prices present a financial stability risk to the economy, according to the RBNZ.

Further macro-prudential measures have been announced including fresh loan-to-value (LTV) measure adjustments. The central bank is applying a nationwide speed limit for all investor lending, permitting no more than 5% of lending at an LTV greater than 60. Additionally we have seen the application of a nationwide speed limit for all owner-occupier lending, permitting no more than 10% of commitments with an LTV of greater than 80. That gives the central bank more room to lower the policy rate.

Weaker dairy prices and high trade weighted exchange rate are also cause for concern for RBNZ. While domestic growth has surprised to the upside, we expect RBNZ easing to push NZD lower from here. Additional catalysts from here include the release of dairy auction results and 2 year inflation expectations the week before the RBNZ meet.”