RBNZ: the doves fly ... too high - TDS

Analysts at TD Securities explained that the RBNZ left the cash rate at 1.75% as widely anticipated, but the forward guidance was unexpectedly dovish, with "We expect to keep the OCR at this level through 2019 and into 2020.

Key Quotes:

"The direction of our next OCR move could be up or down"."

"Justifying this low for longer dovish shift, the RBNZ's 2% mid-target inflation forecast was pushed back into early 2021, despite a lower TWI profile. The OCR profile was flattened, the first increase pushed back to Q3 2020."

"The economy is in far better shape than these inflation and cash rate projections suggest, but the RBNZ appears determined to sit on its hands for quite some time. The slump in business own activity (and investment intentions) remains the #1 concern for the RBNZ and the government at the moment (although a lower cash rate won't help businesses, policy certainty will)."

"The NZD slumped to $US0.67 (from $US0.675) on the dovish guidance, and AUDNZD jumped to 1.11. Orr is giving investors no solid reason to hold NZD, although net short positions are already stretched. In the press conference, Orr suggested that the currency was close to 'fair value', prompting a recovery and leaving the floor at $US0.67 for now."

"The 2yr swap rate is 6-7bp lower, and at 2.05% is the lowest in two years. OIS is trading sub-cash. The rates market does not reflect an economy expanding at an above-trend pace with maximum sustainable employment."