FX comment – Further weakness in NZD as RBNZ likely to lower OCR in March

by: Roy Teo

 

  • RBNZ keeps OCR unchanged; signals further easing may be warranted
  • Further weakness in NZD ahead as RBNZ likely to lower OCR in March

 

 

RBNZ keeps OCR unchanged; signals further easing may be warranted

As widely expected, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.5% this morning. The RBNZ’s concern on the global economy has increased due to weaker growth in emerging markets and concerns about China. Inflation is expected to increase this year, though abeit at a slower pace than previous forecast. On the exchange rate, the RBNZ seems to be more comfortable with the recent decline in the New Zealand dollar (NZD), though reiterating that further depreciation in the NZD is appropriate given the ongoing weakness in export prices. On balance, the RBNZ signalled that further policy easing may be required over the coming year to ensure that inflation recovers to the middle of the 1-3% target range. The NZD was sold off by more than 50 pips to 0.6430 as a result.

Further weakness in NZD; RBNZ likely to lower OCR in March

We maintain our bearish view in the NZD as the RBNZ is likely to lower the OCR by 25bp to 2.25% as soon as March later this year. Inflation and dairy prices have been lower and longer than expected. The decline in the NZD has also been slower than the central bank’s forecast given that the NZD trade weighted index was about 5% stronger than expected as of the end of 2015. Nevertheless, the RBNZ is also likely to wait for more indications that house price inflation is moderating before further loosening monetary policy given house price inflation in Auckland remains a financial stability risk. We expect the NZD to decline to around 0.58 against the USD by the end of this year.

 

28 Jan 1