RBNZ on hold, but cut in August likely

The RBNZ decided to leave interest rates on hold at their meeting today, but made it fairly clear that further rate cuts were very much on the horizon.

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Source: Bloomberg

The recent rise in commodity prices over the past few months has provided some support to the local economy. The slight improvement in economic activity and ongoing debate about the “financial stability concerns” being generated by house price inflation in Auckland and other regions appeared to move them to a hold.

But the major concern for the RBNZ continues to be worryingly low inflation. We thought this may have overridden other concerns and led them to cut again today (after a pause at their last meeting), but it looks like the thinking is to wait until 2Q CPI comes out on 18 July and then cut in August. NZ monthly food prices have been lifting a little of late, but headline inflation in 2Q is still set to be well below 1%, providing ample evidence for another rate cut.

The Kiwi dollar has already rallied 5.8% since 30 May, although much of this has been driven by collapsing expectations for further US interest rate increases. Today’s post-meeting surge has seen it break through key resistance at the US$0.7050 level and hit its highest level since 11 June 2015. If US data continues to disappoint, the Kiwi could continue to push higher in the near term. However, risks to the downside are clearly the potential for another RBNZ rate cut in August or a run of better-than expected US data.

The recent strength in the Kiwi dollar does not bode well for 2Q CPI, and the statement noted that “this is holding down tradables inflation”. As you can see in the chart, tradables inflation has remained in outright deflation since mid-2014.

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But house price inflation has been has been rocketing up again in 2016, adding to financial stability concerns. The Auckland housing market in particular is looking increasingly bubbly.

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Dairy prices have lifted a little alongside other commodities. But the global diary market is still deeply oversupplied and the Niger Delta Avengers are unlikely to start attacking the production hubs of New Zealand’s major competitors like they’re doing in the oil market.

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