RBNZ OCR Review: Bank not dovish as some were expecting - TDS

The RBNZ left the cash rate at 1.75% as widely anticipated and left the last paragraph unchanged and while the Statement left the impression that uncertainties remain high, the Press Conference revealed a more upbeat RBNZ, explains the research team at TDS.

Key Quotes

“The cash rate profile was left unchanged in 2018, but was nudged a touch higher in 2019/20. To us this is a small indication of where the risks lie on the cash rate— to the upside.”

“The NZD jumped 40 pips on the release of the statement and then extended a little higher as the RBNZ Gov indicated in the press conference that new government policies would add an additional 0.5% to GDP relative to Aug MPS forecasts.”

“The OIS strip is about 2bps higher out to June’18, 4bps higher for Aug’18 and Sep’18 and up 6-8bps higher between Nov’18 and Feb’19. A 25bps hike in Nov’18 is now close to 90% priced.”

“We were of the view that traditionally-hawkish Spencer would step up vigilance against unsustainable debt and leverage. However, it appears that the ongoing uncertain political backdrop is a substantial impediment.”

“The ongoing saga of the expanded PTA mandate risks compromising the independence of the RBNZ, with the new government implying that it is calling the shots on monetary policy. With the economy all-but fully employed on many metrics, expanding the mandate hints at populism rather than economic imperative. That said the RBNZ Gov did say that expanding the mandate to include employment would not be expected to materially change the operation of monetary policy.”

“Overall, as much as we remain of the view that the RBNZ “should” be trying to get ahead of the curve, we push out our first RBNZ +25bp hike from February to May 2018, reducing the 2018 hikes needed from +75bp to +50bp, for an end-2018 OCR of 2.25%.”

“Our paid NZ OIS and 1y1y positions vs AU OIS and 1y1y are in the money and we will continue to hold. In FX our colleagues like short GBPNZD.”