At its August monetary policy meeting held overnight, as anticipated the RBNZ kept rates unchanged disappointing the bulls with a more dovish tone than expected. Commenting on the outlook for the bank’s rate path, the RBNZ reaffirmed its message that “the direction of our next move could be up or down”. However, in a more dovish twist, the bank changed the signal in its forecasts, moving the first projected rate hike (as stated in the May meeting) from 2019 to late 2020.
Rate Hike Forecast Moved Out
The updated OCR projection now implies rate hikes starting from around Q3 2019, with the cash rate projected to lift to 2% by late 2020. While both these dates sit outside of the realm of the “foreseeable future” noted by the bank, the shift in projection is a clearly designed dovish signal for the market to warrant against any speculative strengthening in the exchange rate.
In the statement, the RBNZ acknowledged the difficulty it is facing in applying effective monetary policy. Softening activity and rising inflation is only making the environment more difficult. However, the RBNZ continues to note that it will “look through” volatility in CPI inflation and only intends to address “persistent movements in inflation”, adding that higher core inflation recently is a “welcome” development.
Inflation Revised Lower
However, the near-term outlook for inflation is lower, driven mostly by weaker tradables inflation that can be traced back to the Trade Weighted Index price and petrol prices. Non-tradables inflation is forecast to be slightly higher, however, though weaker again from mid-2019 due to the estimated output gap starting point having been revised lower to around zero and even estimated to have turned negative in Q2 and forecast to remain negative for a year.
Headline inflation is now projected to hit 2% by Q1 2021, rather than Q4 2020 as projected in the May meeting. Though it is worth noting, while the CPI might follow a similar path, due to the lower output gap, there is now a significant weakening in the non-tradables measure.
Growth Revised Lower
The near-term outlook for GDP was also revised lower on the back of the negative surprise seen in Q1, weaker business sentiment, and weaker house price inflation. However, growth is projected to “recover to some extent” in the second half of the year fuelled by a rise in consumption. Across the medium-term horizon, growth is forecast to be boosted by monetary policy, fiscal policy, business investment and net exports. Business investment remains an integral part of the bank’s assumption, as firms are expected to react to capacity pressures and higher labour costs. However, the bank does acknowledge that the decline in business confidence presents a risk to this outlook.
Alongside weak business sentiment, the RBNZ also noted weakness in house prices as a risk to the economic outlook if they feed through into investment and hiring, in which case the OCR track is 1% lower. However, if higher prices pass through into medium-term inflation projections, inflation would be higher than forecast, in which case the OCR would need to be around 0.5% higher. Referring to the risks around the forecasts in the press conference following the meeting, the RBNZ Governor said they were “balanced”.
The shift in tone at this meeting, specifically with moving out the projection for the first rate hike is a clear signal that the bank has become more dovish. While risks are noted as balanced, for now, it seems that the bank is more concerned with downside risks in which case, any further data weakness will weigh heavily. In real terms, moving the first rate hike out from late 2019 – late 2020 doesn’t make that much of a practical difference as conditions can change drastically by then. However, the fact that the bank saw the need to shift the projection at this point is a strong dovish sign for the market and has reacted accordingly.
NZDUSD is now sitting on the completion of a large ABCD corrective pattern, with the 61.8% retracement from 2015 lows just below. The rising trend-line from 2015 lows are sitting just below creating a strong technical confluence. However, if these levels break, the next area of support will be the .6350 – .64 region (2016 low).