RBNZ: OCR at 2.0% but a clear easing bias - ANZ

Research Team at ANZ, suggests that as expected, the RBNZ delivered a balanced and measured (and largely unchanged) statement today, maintaining the OCR at 2.0% but retaining a clear easing bias.

Key Quotes

“The factors shaping the monetary policy outlook (strong NZD, low inflation and inflation expectations, housing concerns, solid domestic economy, global fragilities etc) have all been signalled before. We continue to see a further 50bps of OCR cuts in November and February.

Key Points

• Today’s policy assessment was largely unchanged from the one delivered in August. Importantly, the RBNZ still believes that “our current projections and assumptions indicate that further policy easing will be required to ensure that inflation settles near the middle of the target range.” The language seems pretty clear that a November cut is likely.

• The broad factors shaping the monetary policy outlook are unchanged from what the RBNZ had already signalled. Global fragilities remain, the NZD is strong and dampening inflation pressures, the domestic economy is performing well, housing remains a financial stability concern (though signs of moderation is noted), and while inflation is expected to lift, low inflation expectations remain a concern and risk.

• The one change of note was a dropped reference to the NZD making it difficult for the RBNZ to hit its inflation objective. We are not entirely sure what to make of that. Nothing, because it is implied (obvious) anyway? Or does it mean a greater degree of resignation on the part of the RBNZ that it can do little about NZD strength? At this stage we are leaning towards the former interpretation.

• Stepping back, it remains a case of the RBNZ operating in an environment full of tension. “Traditional” policy signals (growth, capacity, labour market, housing etc) are arguing for no further stimulus (or even less!), but are going head to head with the likes of the strong NZD, fragile global economy and low inflation – factors that, while in many ways beyond the RBNZ’s direct control, argue for more stimulus.

• The RBNZ has signalled it will be taking a measured approach to addressing that tension and today’s statement is consistent with that. It is not about to take policy sharply lower, nor will it sit back and do nothing. It is a backdrop where the OCR is biased lower as the RBNZ attempts to respond to the things it can’t control by over-stimulating the things it can (the non-tradable side of the economy). That strategy is not without its risks, but is a pragmatic approach right now. We still expect OCR cuts in November and February.

• Confirmation that “further policy easing will be required” will soothe a market that had become sceptical of the RBNZ’s desire to continue easing, and is the strongest hat-tip to a November cut the market could ask for. We expect the short end and forward rates to resume grinding lower from here, and for geographic bond spreads (which have under-performed badly) to narrow in gradually over coming weeks, assisted by index duration extensions due at the end of the month.”