RBNZ Monetary Policy Statement - Preview
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RBNZ Monetary Policy Statement - Preview
RBNZ Monetary Policy Statement
(To be released at 9.00am NZT, 16 May 2001)
11 May 2001
We expect the RBNZ to lower the OCR by 25 bps to 5.75% (at least 80% probability) and to stress again that it should not be assumed that further rate cuts will follow.
In our view the chance of no cut is at least as great as the chance of a 50bp cut.
Only one market commentator now expects a 50 bps move, down from four at the beginning of the week, with the remainder expecting a 25bp cut. The market is currently pricing a full 25bps rate cut and less than 5% chance that the RBNZ goes further and cuts 50bps.
The Bank will explain its rate decision with continued global uncertainty and the adverse impact on New Zealand's near-term growth outlook.
However, the RBNZ is likely to make an effort to temper the market's expectation of a further easing going forward by pointing to the growth buffer provided by the low NZD and resilient commodity prices and to upside inflation risks arising from the tight labour market and strong external cost pressure.
The argument for a larger cut appears to be largely based on an alternative scenario presented in the RBNZ's March Statement, which assumed a significantly weaker global growth profile than included in the central forecasts. That scenario showed cash rates bottoming at 5.0% some time next year. While the international data has moved halfway towards the pessimistic scenario, it should not be overlooked that higher-than-expected inflation data (export/import prices, wages, weaker-than-assumed NZD) has provided a significant offset for the RBNZ's interest rate projections.
A 50 bps rate cut, i.e. picking up the pace of the easing cycle at this stage, would also make it difficult for the RBNZ to credibly argue that the 16 May rate cut could be the last one during this cycle. It would most likely cause the market to become more aggressive in pricing further easings, thereby undermining the RBNZ's desired wait-and-see approach.
Consistent with this wait-and-see approach towards further rate cuts, we expect the Bank to project the 90 day bill rate to average 6% until late 2002. Given the applied rounding, that is consistent with cash staying at 5.75% over that period. For 2003 we expect the RBNZ to signal some modest re-tightening. Following from a lower starting point, we also assume that the Bank will incorporate a slightly lower NZD track than in the March projections (see table below).
The more stimulatory profile for monetary conditions will be consistent with the expected downward revision to the 2001/02 growth outlook from 3Ÿ% to 2Ÿ%. Growth projections for the subsequent two years are expected to remain unchanged around 3-3Ÿ% p.a.
The RBNZ is likely to show inflation falling back to 2% by early 2002, compared to 1.5% in the previous forecast, with the above-mentioned external and domestic cost factors accounting for the difference. Annual inflation rates of 1.5% are likely to be projected for the later part of the forecast period.
Expected market reaction
If the RBNZ cuts 25bps
The June and Sept bills (currently 94.37 and 94.55 respectively) will sell off very slightly due to the market taking out of the small chance of 50bps that is currently priced in. The rest of the curve will be little changed. The NZD will likely show little reaction.
If the RBNZ cuts 50bps
The bill curve will rally strongly as the market prices lower interest rates in future.
The bond curve will also rally, more so at the front end than the long-end leading to a steepening between the 3 and 10 Y part of the curve.
The NZD reaction is harder to judge. On balance, we think the reaction would be negative, at least over the short-term, reflecting lower than expected interest rate differentials and concerns about what had led the RBNZ to ease by more than the market expected.
If the RBNZ does not cut
Bills will sell off along the curve as the market is unlikely to assume - considering that the global easing cycle is nearing its end - that the RBNZ will compensate for the missed easing opportunity by easing more aggressively later. The bond curve should be expected to flatten in this scenario. We would expect no rate cut to be supportive of the NZD.
Ulf Schoefisch, Chief Economist
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