RBNZ likely to stay on hold on rise in oil prices, global dairy trade lends support

The Reserve Bank of New Zealand is likely to stay on hold at its monetary policy meeting scheduled on June 9 at 21:00GMT. The central bank is largely expected to leave the Official Cash Rate at its record low of 2.25 percent.

According to 23 economists polled by Reuters, 14 expect the central bank to stay pat, while 9 are looking forward to a 25bps cut to 2.00 percent this week, although majority expects a cut by the end of H1 2016. Meanwhile, stabilizing oil prices, coupled with a bust in housing demand in Auckland, pose enough reasons for the central bank to keep rates unchanged.

The Q4 unemployment rate fell to 5.3 percent, the lowest since March 2009 from 6.2 percent in the previous quarter. Q4 gross domestic product also rose 0.9 percent q/q and 2.3 percent y/y. The Q1 consumer price index-led inflation rate rose to 0.4 percent y/y from 0.1 percent previously.

Further, dairy giant Fonterra's Global Dairy Trade price index rallied for the third straight period to 3.4percent, marking the second consecutive gain in the eight Global Dairy Trade auctions held so far in 2016. Five out of the past six auctions have seen an increase in prices.

Further, latest releases by the RBNZ Governor Wheeler signaled a pause mode, while expressing optimism over declining oil prices. Prices are, however, expected to recover by end 2016 and therefore, a rate cut cannot be completely ruled out given that the domestic currency is trading with an upward bias against its major trading partners.

We foresee a rate cut in September this year if oil prices recover amid less possible fall in global dairy prices. The upcoming policy meet shall be accompanied by the release of the RBNZ's Monetary Policy Statement (MPS).