Nomura: The RBNZ hiked its policy rate by 25bp to 3.50%, in line with market expectations. The accompanying statement signals that the central bank is considering taking a pause, saying, “It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level”. However, the second part of the statement suggests that it is not the end of the hiking cycle saying that “the speed and extent to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.
With the explicit mention of a pause in the statement, we think that rate hikes are unlikely for some time. As such, we believe that the RBNZ will remain on hold for the rest of 2014, but to restart the hiking cycle in Q1 2015 . However, the timing of the resumption of the hiking cycle will depend on growth, inflation and the exchange rate.
BNZ: In advance of today’s OCR review we believed that the RBNZ would do four things: – Raise the cash rate to 3.5% from 3.25%; – Signal a pause in the tightening cycle; – Maintain a tightening bias with a desire to see the cash rate eventually move back towards neutral; and – Suggest that the timing and extent of the next moves would be entirely data dependent with a focus on the currency. Moreover, we suggested that the RBNZ Governor would highlight his ongoing concern at the overvaluation of the NZD. This has proven to be exactly what the RBNZ has done.
The RBNZ Governor could not have been more aggressive in his comments on the currency if he had tried: “With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall”.
The RBNZ must have been overjoyed by the market’s response to these comments and the OCR review more generally: the NZD has fallen three quarters of a cent; a 50/50 chance of a rate hike is priced in for December and, while there has been a modest decline in swap yields, a firm upward slope in the rates curve remains with the ten year swap sitting at 4.71%.
Our forecast rate track remains unchanged as a consequence of today’s statement. We forecast no change in rates in either September or October and a resumption of the tightening cycle in December. We have the cash rate at 4.75% at the end of 2015 and an eventual peak of 5.00%.