RBNZ will struggle to sound as dovish as last time – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that there is no expectation that the RBNZ will cut rates on Thursday this week, but the market will be watching to see if the RBNZ repeats its view that, “A decline in the exchange rate is needed” and continues to project that, “further policy easing will be required”.

Key Quotes

“There is some risk that the RBNZ walks back these dovish views.  Economic data have broadly surprised on the strong side and dairy prices have rebounded significantly, suggesting that the economy is coping well with the current level of the exchange rate and rate cuts are not needed with recent economic growth well above trend.

Dairy prices are up solidly from recent lows in July by around 20%, The Rabobank survey of New Zealand farmer confidence rose to a three-year high.  A Net 35% of farmers see improvement in the rural economy over the year ahead, up from 3% in July.

The broad sweep of New Zealand economic data suggests that the economy is growing solidly above trend (around 2.5% to 3%).  Q2 GDP rose 0.9%q/q and 3.1%y/y.  This was above the RBNZ forecast in its August MPS of 0.8%q/q, and with an upward revision to Q1, the annual growth rate was 0.3ppt above the RBNZ forecast.

Other more forward-looking activity indicators suggest growth continues to operate significantly above trend.  Business surveys remain in a moderate to strong range.  Job advertisements have re-accelerated this year, internet ads were up 18.8%y/y in August, returning to the previous high growth rate in 2014.

The most recent GDP data suggest that the RBNZ is closer to achieving its higher output gap already, and thus it will be less inclined to cut rates.  But presumably, it will still suggest a further rate cut is more likely.  It is also likely to note that the higher NZD my place more unwanted downward pressure on tradable inflation.

The RBNZ can use its macroprudential policy measures to help justify its bias to cut rates.  These measures are set to be implemented on 1 October, and might be expected to help keep a lid on the buoyant property market.

The stronger dairy prices and solid pace of growth make it less clear that a weaker currency is needed and additional rate cuts are less urgent. Overall, the underlying conditions have improved for the NZD since the August policy statement, and the outlook for the currency remains robust.  Barring outside influences, the NZD might be expected to retain a rising trend.”