Key Points
- Once again the RBNZ played a straight bat today. The OCR was left unchanged this morning at 1.75%, and the wording was neutral. The wording was so neutral, bank officials were seen in beige brigade jackets. The beige tone was re-stated with: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly"
- The one-page statement was in line with February's MPS assessment. However, there were some minor tweaks made, including the removal of a paragraph mentioning the currency. The Kiwi TWI has tracked the RBNZ's most recent forecast. Enough said.
- Other changes in the statement included: recognition of stronger commodity prices, and weakening near-term inflation. However, the minor adjustments do not in any way reflect a change in view by the Bank. The RBNZ's February forecasts showed CPI inflation cooling to 1.1% yoy in the March quarter, from 1.6% yoy at the end of 2017, before gradually lifting to the 1-3% inflation target midpoint. Weak inflation is a global phenomenon. Spare capacity is being absorbed, but has yet to translate into stronger pricing. It's a waiting game, and we have time on our side. Let's see if the USD manages to strengthen enough to provide us with some currency relief downunder.
- The OCR Review is the last policy decision presided over by RBNZ Governor Grant Spencer, while we and the markets await next week's official start of Adrian Orr and the Policy Targets Agreement he will sign.
Policy Implications
Today's OCR review was never expected to signal a change in view by the RBNZ. As a result, we maintain our view that we expect the RBNZ to sit on its hands for a while longer and start gradually hike the OCR from May 2019. We expect growth and inflation to begin strengthening from the second half of 2018 and as we move into 2019 giving the RBNZ confidence that lifting the OCR is the correct response to ensure inflation settles at the 2% target band midpoint over the medium term.
Market Reaction
Financial markets were busy this morning, just not with the RBNZ announcement. Market pundits were playing the Fed, and the Fed delivered exactly what was expected. The Fed hiked 25bps to 1.5-1.75%, and lifted their forecasts of future interest rate hikes. US Treasury yields eased ever so slightly, as the Fed's announcement was pre-priced in markets. The upper bound of the Fed Funds target rate now matches the RBNZ's OCR. For the first time in nearly 20 years (1999), the US cash rate will rise up above the Kiwi cash rate in 2018. The last time US rates were above Kiwi rates, the Kiwi dollar came under pressure, significant pressure. The flightless Kiwi dropped below (US) 40c in 2000. The Kiwi won't fall anywhere near as far today, in part because our terms of trade (NZ's purchasing power with the rest of the world) are stronger today. Interest rate differentials count, and should help guide the Kiwi flyer lower this year.