RBNZ To Tweak Rhetoric In April Policy Statement

RBNZ To Tweak Rhetoric In April Policy Statement

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• RBNZ will change official guidance on April 29, but should leave cash rate steady

• Rhetoric change needed given that RBNZ now is less likely to lift rates in June

• First OCR hike should be delivered in July, but we now expect a 25bp move

We expect that the RBNZ, in the statement accompanying the next official cash rate (OCR) announcement on April 29, will step away from its current policy guidance. The official guidance indicates the policy stimulus still in place may be removed “around the middle of 2010.” This has led most market economists to forecast that the first OCR hike will be delivered in June. In fact, 12 of the 16 economists surveyed by Bloomberg last week expected a June move. We believe that the risk of a June hike has diminished in recent weeks, however, given the slew of economic data falling on the softer side of expectations. Market pricing suggests a 60% chance of a June move, but our forecast calls for the first hike to be delivered in July.

In the wake of the disappointing economic data, particularly the sustained weakness in credit, the RBNZ will likely be concerned that economic conditions will not support a rate hike “around the middle of 2010.” If so, we believe that the RBNZ will, on April 29, lay the foundation for a later-than-June move. We expect Governor Bollard to drop the explicit reference to the likely timing of the first hike, thus allowing greater flexibility when making future policy decisions. The commentary should, therefore, suggest something along the lines of: “if economic conditions evolve broadly as expected, current policy settings will need to be adjusted to ensure that inflation remains consistent with the Bank’s target over the medium term.”

ENDS

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