RBNZ cut priced, but take the long term view – RBS

Mansoor Mohi-Uddin, Research Analyst at RBS, suggests that the Reserve Bank of New Zealand has shifted stance sharply by explicitly linking weak inflation to the kiwi’s strength.

Key Quotes

“Short term rates now fully price one 25bps rate cut from the RBNZ on August 11 and one more cut in the next year. But with a 2.25% official cash rate, the RBNZ may need to ease by up to 100bps now to weaken the kiwi sufficiently.

First, the central bank was rattled by CPI again printing below forecast at 0.4% to issue a rare inter-meeting update. Second, the RBNZ explicitly warned the kiwi needs to fall sharply in order to get inflation back towards its 1-3% target band. Third, the RBNZ has more scope to ease now as Auckland’s mortgage lending limits are expanded across New Zealand. Last, Governor Wheeler is facing strong criticism with inflation persistently below target as his term ends September 2017. If Q3’16 CPI expectations stays weak, the RBNZ will likely start easing by up to 100bps until Wheeler’s term finishes.”