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Will the RBNZ slash rates tomorrow? Consensus tilted towards 25bp cut

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 9, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - New Zealand’s reserve bank finds itself stuck before it meets tomorrow to decide on rate hike. The current 0.4 per cent inflation makes it necessary for the central bank to slash rates to stimulate demand and boost prices in the process. However a decision to slash rates will likely cause a sharp rise in asset price and also fan its already red-hot housing market. This dilemma will weigh on policy makers when they meet tomorrow.

    The broad market expectation is that the central bank will slash rates at its meeting tomorrow. Majority of the economists polled by Reuters expect the Reserve Bank will cut the official cash rate to 2.5 per cent. Bloomberg’s survey also showed economists expect the RBNZ to cut the cash rate by 25 basis points. Traders feel the currency market will volatility whether or not the RBNZ slashes rates. Any gain in the currency will be limited in case the RBNZ hold rate steady as the prospects of a fed rate hike next week looms large.

    Inflation pressure

    The RBNZ had in September predicted inflation would return to 2 per cent in the third quarter of 2016. Its current inflation stands at 0.4 per cent, much lower than the target. The RBNZ can be thus expected to return the rates to the record low level when it meets tomorrow. The four rate cuts of 2014 could not help in raising inflation. Dairy prices have also dipped hurting the economy further. Governor Graeme Wheeler admitted another rate cut was required to ensure inflation “settles near the middle of the target range.”

    The broad market expectation is that Wheeler will take advantage of the rate hike by the Federal Reserve and boost import prices by weakening the currency. Unfortunately for Wheeler, even expectations of Fed’s rate hike for the first time in almost a decade failed to keep the currency down. The kiwi has moved up more than 3.5 per cent this quarter.

    Kim Mundy, an economist at ASB Bank in Auckland therefore feels that “The RBNZ can no longer afford to wait and watch.” She added that the RBNZ would have to act and slash ORR if it wants achieve medium term inflation target.

    Housing market boom

    The central is needed to slash rates to control inflation. The RBNZ must however bear in mind that property prices in Auckland are surging. Record immigration and a housing shortage have led to this sharp rise in price in the housing sector. Worse still, there are signs that the boom is spreading. House prices grew at the fastest pace in 10 years in November growing 15 per cent from a year earlier.

    How far will a rate cut address NZ’s inflation woes?

    Record monetary stimulus by central banks of the major economies has not been able to boost prices. The failure of the central banks to meet inflation targets remain a concern. This together with Auckland’s property boom has posed a question before economists: if at all targeting inflation with rate cuts is the only way to prompt economic recovery. Stephen Toplis, head of research at Bank of New Zealand in Wellington aptly describes the situation saying that RBNZ will cuts rates to address inflation worries but it should not. Toplis questioned “Surely what’s happening around the rest of the economy matters as well. Isn’t it a bit dangerous to be adding stimulus in this environment?”
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