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 continues to improve but wage growth subdued due to surplus capacity. Commodity prices stable. Bond yields low, credit spreads narrowed and stock prices at a record high. Global monetary policy accommodative but becoming less stimulatory. (Neutral bias)
• It notes that the exchange rate eased since August monetary policy and is sustained, a lower exchange rate will increase tradable inflation and deliver balanced growth. (Mild hawkish bias)
• Growth in June quarter was in line with the expectation, following relative weakness in the previous two quarters. Employment growth strong, and GDP growth is expected to improve going forward, with a weaker outlook for housing and construction offset by accommodative monetary policy, elevated terms of trade and fiscal stimulus. (Mild Hawkish bias)
• The Bank has incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild program; tighter visa requirements; and increases in the minimum wage. The impact of these policies remains very uncertain. (Mild dovish bias)
• Annual CPI inflation was 1.9 percent in September although underlying inflation remains subdued. Non-tradable inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.  Tradable inflation moved higher due to higher oil price and weaker exchange rate but set to ease I line with projected weak global CPI. Longer-term inflation expectations remain well anchored at around 2 percent. (Mild dovish bias)
• RBNZ welcomed the recent moderation in house prices, due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing. (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 relatively neutral to hawkish in nature. With this statement, we expect the RBNZ to keep going on with their rate pause but prepare the markets for future rate hikes, with first one in 2018.

The kiwi is currently trading at 0.695 against the dollar.