Now that the RBA meeting is over, and concluded with what is being called a “dovish hold”, attention is moving on what we can expect out of New Zealand later today.
Because of how connected the two economies are, their monetary policy tends to move in tandem. There was a pretty broad expectation that if the Australian regulator moved, then the Kiwis would follow suit.
However, the reality on the ground is that New Zealand’s data has been broadly better than the situation in Australia. That being said, there has also been some weakness in the inflation data. This has led many analysts to project that a cut in the reference rate in New Zealand is mostly contingent on keeping pace with Australia.
Going Forward Now
This time around, the RBNZ is debuting a new rate decision format. Previously, it was at the discretion of the Governor, but now there is a 7-member committee. So the breakdown of the vote will be important this time.
We are expecting the rate decision at 04:00 CET (or the day before at 22:00 EST.) It comes along with a monetary policy statement and a press conference that will follow an hour later. All of these are likely to move the market.
The consensus of expectations is that the RBNZ will likely echo the “dovish hold” of the RBA. This means traders will be focused on the policy statement and how the outlook has changed since the last meeting. There is, of course, the option that the RBNZ strikes a less dovish tone, given the relatively better position their economy is in.
The bottom line is currency stability, as well as last quarter’s CPI in both New Zealand and Australia, showed a move away from the target rate. But the Kiwis are in a better position. Annualized inflation was last reported at 1.5% compared to 1.3% in Australia. This gives further credence to the idea that the RBNZ can stand pat on rates for a little longer than their bigger neighbor.
The other issue of note is that the RBA made little reference to the housing issue, which is widely being blamed for a portion of the economic issues in Australia. New Zealand doesn’t have that issue. It’s, therefore, more likely the banks are considering a broader look at the economy.
The reaction in the NZD following the RBA decision shows that the market is already pricing in a similar result from the RBNZ. This means we could have less volatility as a result. But the key here is still going to be the language used by the bank. And there are expectations of a cut in the interest rate outlook.
One of the often forgotten aspects of monetary policy in both Australia and New Zealand is that they have a policy of keeping rates relatively high in order to attract carry trades. This means that while traditionally cutting rates makes more liquidity available, it will also result in carry trade repatriation. This makes it less likely for the RBNZ to cut rates in similar inflation scenarios as other central banks.
Still, we should be mindful of the potential that the RBNZ does decide to get out ahead of things and cuts the rate. This would be a major market surprise and send the kiwi tumbling.