RBNZ might close door to further easing after today’s 25 bp rate cut

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 10, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - New Zealand's central bank cut its benchmark interest rate (ORR) by 25 basis points back to the record low of 2.50 per cent. The central bank is confident it will be able to achieve its inflation target of 2 per cent without any further monetary easing. Therefore no more easing seems likely in the pipeline for now.

    The central bank forecast a relatively flat 90-day bank bill. The monetary policy statement also reintroduced the warning about the overvalued NZD exchange rate. The warning was removed from the statement in October.
    Today’s RBNZ statement was not very dovish and this led its currency to rise above $0.67.

    Why more easing does not seem likely?

    Economists see rates holding steady at 2.5 per cent until the first quarter of 2017. RBNZ governor Graeme Wheeler had put rates on hold after having slashed it four times last year.

    The RBNZ in its today’s report projected 1 to 3 per cent inflation range in the first quarter of 2016. The bank stated "we expect to achieve this at current interest rate settings.”

    Strong gains recorded in tourism and immigration have strengthened NZ’s service sector. This has somewhat offset the losses incurred from falling export prices. Good news for the economy is that an auction has recently showed that dairy prices were beginning to stabilise. Analysts have however warned that recovery in dairy prices will likely be slow and that it will act volatile for some more time.

    RBNZ governor says “bank will reduce rates if circumstances warrant"

    NZ Capital Economist Chris Green said that only “high hurdles” for the economy will justify further rate cuts. He however added that "the risks distribution around this forecast is very much skewed towards an additional easing, particularly if the global or domestic environment were to deteriorate sharply from here”.

    Many economists are of the opinion that the central bank’s expectation of meeting inflation target by 2016 might not materialize, creating room for more cuts. ASB Bank Senior Economist Jane Turner observed "Our view is the circumstances will warrant further OCR cuts in June and August next year to 2 per cent. We are firmly of the view inflation pressures will not prove to be as strong as the RBNZ currently estimates.”

    With global dairy prices constantly falling and volatility in China on the rise, it has been an uphill task for the policy makers to devise a mechanism to sustain growth this year. Under these pressures the central bank began unwinding interest rates in June, after having raised them to 3.50 per cent previously.

    RBNZ's Wheeler admitted that there remains several risks to the economy. Record level of immigration, a possible drought associated with El Nino and decline in export prices might pose serious challenges before the economy. Keeping this in mind the governor added "We have interest rates at 2.5 per cent, which compared to the U.S. and Europe, is still a buffer. We have room to cut if we need to."
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