FXStreet (Guatemala) – Jane Foley, Senior Currency Strategist at Rabobank explained there is currently a lot of debate in the market as to whether the RBNZ will or will not cut interest rates at its regular policy meeting on June 10.
Key Quotes:
“Currently, the Bloomberg survey suggests that only 4 of 12 economists anticipate a policy move next week. However, the drop in the value of the NZD in recent weeks suggests a build up in short positions indicating that the market may well be disappointed on a steady interest rate announcement this month.”
“Rate cut speculation was triggered in April by remarks from Deputy Governor McDermott that “it would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target”.
“Following a similar statement from Governor Wheeler at the April 30 policy meeting, speculation that the RBNZ could cut rates as soon as June or July gained further traction”.
“Wheeler listed lower dairy incomes, the lingering effects of drought, fiscal consolidation and the high exchange rate as factors weighing on growth. CPI inflation dropped to just 0.1% y/y in the March Q1 on the back of weak energy prices and a strong exchange rates but of potentially more concern is the low level of core CPI inflation and the central bank’s projection that it is likely to pick up only slowly.”
“On May 13, speculation that the RBNZ may be preparing the ground for a rate cut increased on the central bank’s announcement of new loan-to-value restrictions on Auckland housing. The strength of the housing market and the associated pickup in household debt levels has been seen as a major hindrance to easing for a number of central banks.”
“In Auckland house prices reportedly increased 14% last year, while the rest of the country’s indices remained stable. The NZ government has announced a multimillion NZD development plan to build affordable houses and boost supply, though with strong net immigration into the region and low interest rates fuelling demand, the RBNZ may be understandably wary about cutting rates further and propelling demand.”
“The new LVR announcement includes a restriction on bank loans in the Auckland area for residential property to investors with at least a 30% deposit. However, the new measures will not take effect until October 1 which may argue in favour of a delay to any RBNZ rate cut.”
“While the Auckland property market is clearly a thorn in the side of the RBNZ, a higher than expected Q1 unemployment rate at 5.8% and anticipated weakness in dairy incomes heightens the risk by the July policy meeting.”
“Fonterra has cut its forecast payout to farms for this season by 10 cents to NZD4.40 /kg of milk solids. This compares with last season’s record of NZD8.80. Coincidentally business confidence is falling and weak April credit card spending suggests that retail sales may be starting to taper off after a strong Q1.”
(Market News Provided by FXstreet)