RBNZ likely to cut rate against NZD appreciation

The RBNZ is likely to take action today and cut its key rate. That is what it had indicated at its last meeting: "some further easing in the OCR seems likely". Of course, the word "likely" is open to interpretation. 

"It means that the RBNZ will cut rates again if the data do not improve markedly. Can the upside surprise in inflation in the third quarter (0.2 of a percentage point above the expectations) be regarded as a marked improvement? Well - a majority of analysts at least does not believe any more that the RBNZ will cut the OCR this night", states Commerzbank. 

While inflation has surprised to the upside, it is still considerably below the RBNZ's target range (1-3%). Inflation pressures might have increased indeed if the uptick in inflation was caused by a weaker NZD. Such a development could, in fact, suggest that the RBNZ remain at the sidelines for now. However, this line of reasoning overlooks several other facts, for example that the trade-weighted NZD exchange rate has appreciated by about 7% since the last monetary policy meeting. 

"If the RBNZ does not take action now, it runs the risk of the stronger exchange rate putting downward pressure on both inflation and growth. And growth figures for the second quarter were below the RBNZ's expectations. In any case, not cutting the OCR despite former hints would signal greater optimism than warranted. That is why we believe that the RBNZ will cut its key rate to 2.5% tonight - and why NZD short positions are expected to be quite attractive", argues Commerzbank.