From Westpac:
The RBNZ’s Monetary Policy Statement this morning kept the OCR unchanged at 3.50% as expected, affirmed its on-hold stance, issued a slightly positive assessment in the media release, and lowered its interest rate forecast for March 2017 by 70bp.
Prior to the statement, markets had priced in a drop in the rates track of 75bp. The 70bp fall was thus seen as an endorsement, which would normally cause the market to ratchet even lower. However, the media release, which is a one-page summary of the MPS, was more upbeat than January’s. The swap market was thus unmoved, sitting at 2.55% as we write. In contrast, NZD/USD jumped a cent to 0.7307, suggesting the fx market was positioned for a more dovish statement.
The crucial policy sentence (in italics) was a cut and paste from January: “Our central projection is consistent with a period of stability in the OCR. However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”
The previous warnings about the high NZD exchange rate was repeated: “On a trade-weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals. A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing.”
Interest rate markets are likely to consolidate at current levels, with no fresh directional guidance from the RBNZ today. However, during the weeks ahead there is a risk the market will move rates lower, taking comfort from the RBNZ’s endorsement of its dovish pricing.
