Sunday, 27 September, 2020

New Zealand: RBNZ to retain a conditional easing bias - Westpac

Reserve Bank Governor Adrian Orr Reserve Bank Governor Adrian Orr
Ginger Lawrence | 15 February, 2020, 06:55

The Reserve Bank said economic growth "is expected to accelerate over the second half of 2020", and said the outlook for the economy was brighter amid increased infrastructure investment from the government.

New Zealand's Prime Minister Jacinda Ardern said on Monday that the coronavirus epidemic would have an inevitable impact on economic growth. The chart below outlines the different 3m implied yields now priced by the markets along with our in-house forecasts for 3m interest rates in 2020.

"Overall, the inflation environment is now looking a little firmer than the RBNZ had expected at the time of the last policy statement in November", said Satish Ranchhod, an economist at Westpac in Auckland. Slower global growth over 2019 acted as a headwind to domestic growth.

Orr said the RBNZ considered an "insurance cut" to the OCR, "but didn't see the need". The bank will also publish new forecasts for growth, inflation and the cash rate.

"The OCR forecast will probably continue to show a terminal rate of 0.9% which effectively signals a rate cut as a 50/50 likelihood".

The Reserve Bank's forecast OCR track now has no further cuts pencilled in, and has a hike forecast for 2021.

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Pricing in the overnight-index-swap market had implied a year-end cash rate of 0.83% ahead of the RBNZ's Wednesday decision but that implied rate has risen to 0.90% since the statement was made, indicating a lesser probability of a rate cut ahead and lifting the New Zealand Dollar sharply in the process.

Above: Pound-to-New-Zealand Dollar rate shown at weekly intervals. "We have very low stimulatory interest rates", he added.

The RBNZ surprised economists by playing down the impact of the coronavirus on the NZ economy. The growth rate for infections and deaths is now falling but the Chinese economy remains largely at a standstill and the outbreak is far from over.

Tomorrow will also see the release of December's British industrial and manufacturing production figures, with any signs of an easing off in Britain's industrial sector not boding well for the GBP/NZD exchange rate. Therefore, the New Zealand currency will be reacting mostly to outside news, especially those about the virus outbreak in China.

Looking at longer horizons, the reluctance signalled by the RBNZ around easing prospects likely puts a floor under New Zealand rates for the foreseeable future. "The RBNZ have assumed a 0.3% hit to growth, but are wary of the risk that the impact could prove larger and more persistent which could yet require the RBNZ to reverse course and lower rates further", Hardman says.