FX comment – RBNZ keeps OCR unchanged; warns strength in NZD

by: Roy Teo

 

 

  • RBNZ keeps OCR unchanged for now
  • Weaker NZD expected

 

 

RBNZ keeps OCR unchanged for now

In line with our view, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.75% this morning. The robust growth in the service and constructon sectors and recent recovery in dairy prices warranted a pause in the RBNZ easing cycle. The RBNZ maintains their forecast that inflation will recover to within the 1-3% target range by early 2016 due to base effects. The RBNZ also implied that the strong house price inflation in Auckland is unlikely to persist due to rising residential building and new LVR restrictions on investor lending which will come into effect on 1 November.

Weaker NZD expected

After the RBNZ announcement, the New Zealand dollar (NZD) rose by about 50 pips to around 0.6715 as there was some market speculation that the RBNZ will lower the OCR this morning. However profit taking pushed the NZD lower to around 0.6680 at the time of writing.  We maintain our bearish view on the NZD and year end forecast of 0.64. The RBNZ warned that the exchange rate has been moving higher since September and could dampen tradables sector activity and medium term inflation. As a result the RBNZ would need to lower the OCR more. Indeed we expect the RBNZ to lower the OCR by another 25bp to 2.50% in December given that the current strength in the NZD trade weighted index is more than 6% stronger than the central bank’s year end forecast. Intervention in the currency market to weaken the NZD is also likely, in our view.