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How Likely is the RBNZ to Hold Rates?

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The first meeting of the RBNZ for the year is likely to have extra expectations.

This is one of the four “live” meetings, accompanied by a monetary policy statement and followed by a press conference. Typically, if the bank is going to take action, it prefers to do so in a meeting like this.

However, the consensus among analysts is that it’s unlikely that the RBNZ will cut rates.

There are several reasons for this that have important Forex implications.

The primary reason being cited is the expectation of an increase in inflation. This had already beat expectations in the last quarter and we can expect it to be even higher during the current quarter.

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But, what about the coronavirus?

We would expect the news that has been dominating the Asian markets to have a negative impact on the Kiwi economy. And we would expect the Reserve Bank to step in to help.

But, maintaining currency stability and ensuring full employment are the primary mandates. And there is increasing talk of the country potentially falling into a period of stagflation.

If the RBNZ has to choose between helping the economy, and keeping a lid on inflation, they will evidently focus on the latter. Of course, a flagging economy would imply that employment would suffer.

However, generally, job losses are not felt until quite a while into an economic downturn. Rising inflation, on the other hand, is a problem right now.

What about the trajectory?

With the rates staying steady, what’s likely to have the most impact on the exchange rate is the expectation of what the RBNZ will do in the future. Bond rates would move to match, and that would, in turn, move the currency.

Of the latest survey of economists, there is a unanimous consensus that the Reserve Bank will keep rates steady. This is true at least until the end of the quarter.

25% of economists projected a rate cut by the end of the second quarter. So, expectations are for steady policy, with the bank taking a wait-and-see approach to the economic fallout of the coronavirus outbreak.

Have the fundamentals changed?

It seems like the latest CPI data caught the RBNZ by surprise, coming in above expectations. On the other hand, the employment data published last week disappointed.

With the dual mandates pulling in opposite directions, there is further reason for policy to remain on hold.

The current expectations are for the travel ban from China to last two months. Factories, on the other hand, stopped for one month. But, risk appetite was supported at the start of the week as manufacturers in China restarted operations.

While this would be in the middle of the most active period of the year, the estimate would be an impact of around 0.6% in New Zealand’s GDP growth, given that (admittedly optimistic) scenario.

In the case where job losses are transitory, their return would be projected for when travel restrictions lift, and exports return to normal levels.

Should this be true, the RBNZ might be willing to wait longer and not react immediately to the data. That’s the justification being given by those who expect NZD strength in the near term.

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