Kiwi Update – 9/12/15 – 13:54 – by Arjun Lakhanpal
Kiwi traders were more restrained ahead of today’s reserve bank meeting. The Reserve Bank of New Zealand (RBNZ) will reveal its monetary policy at 20:00 GMT with consensus steering for the third rate cut in 2015 in an environment of plummeting commodity prices. In light of the recent sell-off in commodities and oil in particular, the RBNZ is all the more expected to lower rates if it is expecting to reach its inflation objective for next year.
Analysts are eyeing for the RBNZ to lower rates for the fourth time this year but, the central bank has reasons to hold rates firm. Since their last meeting in October, the New Zealand dollar declined in value versus the Australian dollar, business and consumer confidence are up, spending improved, the trade deficit contracted, housing market progressed and market indicators moved up.
However, there were many issues that the governor of the RBNZ, Graeme Wheeler acknowledged that were swaying monetary policy assessments at his institutions. These were global financial instability meaning China, on which New Zealand is reliant on for its exports of dairy products; the pressures on the same dairy sector and in particular the adversity being faced by over-indebted dairy farmers. Also manufacturing and service sector growth decelerated and most notably labour market movement weakened. So there are sufficient reasons for the central bank to reduce rates or at minimum be very dovish. Last month, RBNZ Governor Wheeler said a continual growth in the currency would entail a lower rate path and some further lessening in interest rates seems likely.
Therefore, these factors represent competing forces in terms of interest rate drivers. On the one hand the government would like to lessen rates to lower the value of the currency as a bolster to exports and to reduce the pressure on indebted farmers, but on the other hand are greatly fearful of a housing bubble, which is a motivator for keeping rates high.
There are see 3 possible scenarios for RBNZ, firstly the central bank cuts rates and remains dovish, which would be very negative for NZD; secondly RBNZ cuts but shifts to neutral, which would cause an initial spike lower in NZD followed by a rapid revival or thirdly, RBNZ leaves rates unmoved but sustains their dovish bias, which would also be encouraging for the currency.
The official cash rate (OCR) stands at 2.75% and the RBNZ is expected to announce a 25 bps cut to 2.50%. After three drops in the Official Cash Rate (OCR) so far this year, the choice to make a further one on this occasion rests on a knife-edge.