RBNZ monetary policy: Assessing future bias

Reserve Bank of New Zealand (RBNZ) announced monetary policy last night and kept its key overnight cash rate unchanged at 1.75%.

Let’s look at the policy statement details to assess the bias –

• According to RBNZ policymakers, global economic growth increased and became more broad-based but uncertainties remain due to surplus capacity and extensive political uncertainty. (Neutral bias)
• It notes that inflation rose in the past years in several countries but recent moderated due to energy prices. The central bank feels that the monetary policy would remain accommodative but less so in future. (Neutral bias)
• Trade-weighted exchange rate rose 3 percent since May in response to higher export prices. A lower New Zealand dollar would rebalance growth outlook. (Neutral bias)
• Domestic growth being supported by ongoing accommodative monetary policy, strong population growth, increased household spending, and rising construction activity. Growth was weaker than expected in the first quarter. Recent changes announced in Budget 2017 should support the outlook for growth. (Mild hawkish bias)
• RBNZ welcomed the recent moderation in house prices, especially in Auckland due to tighter lending conditions and stricter loan to value ratio but uncertainty remains because the supply/demand mismatch remains. (Neutral bias)
• The recent increase in the headline inflation was due to higher tradable inflation namely petrol and food, which RBNZ feels will be temporary but could lead to variability in the headline for the year ahead.  (Dovish bias)
• The increase in headline inflation in the March quarter was mainly due to higher tradable inflation, particularly petrol and food prices. Non-tradable and wage inflation moderate but are expected to increase gradually and it will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent. (Neutral bias)
• Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain, and policy may need to adjust accordingly. (Neutral bias).

Compared to the previous statement, today’s one is little changed with a marginal increase in the hawkish bias. With this statement, we expect a long pause from the RBNZ, unless the current global outlook changes materially, in terms of trade, commodity prices, and political uncertainties.

A lack of dovish tone in the statement has pushed kiwi higher, which is currently trading at 0.726 against the dollar.