RBNZ on hold, lower NZD preferred – HSBC

FXStreet (Delhi) – Research Team at HSBC, notes that the RBNZ kept its cash rate on hold at 2.50%, as expected by all 16 economists in the Bloomberg survey (including HSBC) while the New Zealand’s major dairy cooperative this morning cut its forecast farm gate milk price for the current season from NZD4.60 per kg of milk solids to NZD4.15.

Key Quotes

“After 100bps of hikes in 2014 and 100bps of cuts in 2015, RBNZ Governor Graeme Wheeler started 2016 in relatively cautious fashion. As indicated in a speech late last year, he believes central banks should move carefully in a world of (seemingly ever-increasing) uncertainty. For that reason, the RBNZ was always unlikely to respond immediately to the material downside surprise in the Q4 CPI numbers that were published last week.

Much of the weakness in inflation is, of course, due to volatile tradable items such as petrol and food prices. While the recent further declines in global oil prices look set to keep inflation low through most of 2016, the RBNZ will continue to look through this effect. Today’s statement from the RBNZ pointed out that their own estimate of underlying inflation (1.6%), as well as surveyed inflation expectations, remain more consistent with the inflation target.

However, we believe that New Zealand’s low inflation challenge is about much more than just falling petrol prices. Although the RBNZ’s factoral model of underlying inflation sits at 1.6%, other measures of underlying inflation such as CPI excluding food and energy and the trimmed mean are below the bottom edge of the 1-3% target band. With spare capacity in the domestic economy likely to increase over coming quarters, we believe that lower interest rates will be necessary for inflation to reach 2% on a sustained basis.

A lower exchange rate would also be beneficial, as the RBNZ once again pointed out today. A lower NZD may generate some imported inflation, and would help offset the continued softness in dairy prices. In particular, the NZD has remained strong against the AUD, despite New Zealand’s much lower inflation. Headline inflation in New Zealand ended 2015 at 0.1%, compared to 1.7% in Australia. We see more easing needed in New Zealand than in Australia.”

Research Team at HSBC, notes that the RBNZ kept its cash rate on hold at 2.50%, as expected by all 16 economists in the Bloomberg survey (including HSBC) while the New Zealand’s major dairy cooperative this morning cut its forecast farm gate milk price for the current season from NZD4.60 per kg of milk solids to NZD4.15.

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