RBNZ likely to stand pat on policy today

Today Reserve Bank of New Zealand (RBNZ) will announce its monetary policy around 20:00 GMT. Over the past year or so, RBNZ has reduced rates from 3.5 percent to 1.75 percent, which is an all-time low, however, the bank is unlikely to push a lot further, though it has some more room to do so. But for today, especially after New Zealand Governor Wheeler indicated a slower approach to a rate cut, the central bank is expected to stand pat.

RBNZ is likely to play it cautious, as the inflation is on the rise across the world, along with a recovery in commodity prices. In addition to that, when major central banks are planning to wind up these extraordinary stimulus measures, RBNZ is not likely to stand out.

As RBNZ would not like to fuel the Kiwi dollar higher, we expect the commentaries to remain dovish for now.

Let’s see how the economy and inflation has been doing in the recent past,

• After remaining at 0.4 percent in the first three-quarters, inflation rose to 1.3 percent in the fourth quarter. RBNZ inflation expectations rose to 1.9 percent in the fourth quarter.
• GDP growth has been relatively small. It grew 0.7 percent in the first two quarters and by 1.1 percent in the third quarter of 2016. The unemployment rate is low at 5.2 percent but improvements may take place if GDP growth accelerates.
• Dairy farmers are suffering from costlier kiwi dollar.  However, recently the dairy prices have posed a comeback. Trade deficit remains wide.
• Biggest risk remains speculations in the housing market but addressing the issue using regulations is definitely much effective than  the interest rate. At least, experience from Australia’s housing market suggests so.

New Zealand dollar is awaiting judgment at 0.73 against the dollar. We expect the kiwi to test 0.8 area against the dollar in the near to medium term, if commodities continue their recovery.