Tuesday, October 27, 2015

RBNZ Preview: Taking a breather - Nomura

FXStreet (Bali) - Charles St-Arnaud, Australian Economist at Nomura, notes that this week's RBNZ decision will be a very close call, with a lack of inflationary pressures and a strong NZD pointing to a need for further easing. That said, St-Arnaud anticipates the Central Bank to hold in October, and ease again in Dec.

Key Quotes

"The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 29 October. At the 10 September meeting, the RBNZ said: "A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely,” leaving the door open to further policy easing."

"We believe that this week's decision will be a very close call. While the global outlook has deteriorated, the domestic economy remains robust and the terms-of-trade have rebounded, thanks to a sharp increase in the price of milk."

"Nevertheless, continued weak inflationary pressures and the strength of NZD point to a continued need for rate cuts. Moreover, the increase in milk prices is supply driven, meaning that the sector could be a drag on real growth."

"However, the RBNZ has shown in the past that it prefers to act on meetings that coincide with the publication of the Monetary Policy Statement (MPS). In addition, in his latest speech, Governor Wheeler suggested that further rate cuts are likely, but also signalled that they were not imminent."

"Taking all this into account, we believe that the lack of underlying inflationary pressures, coupled with the strong NZD and the supply-induced increase in milk prices, points to a need for further easing."

"However, we believe that the RBNZ will keep its policy rate on hold, preferring to wait for the December meeting and the release of the SMP to have more data at hand before cutting rates."

"However, we continue to believe that the central bank will cut its policy rate again before the end of the year. As such, we expect the policy statement to continue to reference the need for further policy easing and to continue to express concern regarding the strength of the global economy and the lack of inflationary pressures. With this in mind, we believe that not enough easing is being priced in and that being short NZD offers a good risk-reward."
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