The RBNZ kept the cash rate unchanged at 2.5%. The RBNZ continued to keep rates steady at a record low of 2.5% (Barclays & consensus:2.5%). The cash rate has been at 2.5% since March 2011.
The Governor said the RBNZ’s thinking had not changed since last month, with the statement showing Europe still the key risk. That is, the RBNZ thought that “New Zealand’s trading partner outlook remains poor, with several euro-area economies in recession [with] … a limited risk that conditions in the euro area deteriorate very significantly [such that the Bank continues to monitor the situation carefully given the potential for rapid change”.
The domestic economy is still expected to hold up, although fiscal consolidation and the high NZ dollar should constrain growth. The domestic story is still the same, namely, “the Bank continues to expect economic activity to grow modestly over the next few years [where] housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector”.
Inflation is a non-issue at present. As we highlighted in our 25 July CPI note, the RBNZ’s preferred measure of underlying inflation is less than 2%, although the RBNZ said today that it still thought inflation would “settle near the mid-point of the [1-3%] target range over the medium term”.
We see rates remaining on hold over the rest of this year. A Taylor Rule adjusted for wider bank spreads points to a cash rate of just over 3%, indicating that policy is already at an emergency level. However, we see no change in rates for some time given the uncertainty about Europe.
The market is pricing in some chance of a cut at the 13 September RBNZ meeting. The market had priced in an 8% chance of a 25bp cut today and is now pricing in a 37% chance of a cut at the September meeting. Over the next twelve months, the market is pricing in 14bp worth of easing.
Barclays Capital