Courage required from RBNZ – RBS

James Nelligan, Research Analyst at RBS, notes that the RBNZ cut its policy rate 25bps recently when the markets were pricing a 12% probability of a 50bps cut going into the meeting.

Key Quotes

“The central banks current forecasts imply one rate cut over the next 12 months. Their language has been very specific that a weaker currency is "needed" to push inflation back to target. They forecast 70 on the NZD TWI over the next year. TWI is currently 77. Governor Wheeler looks increasingly reluctant to get ahead of market expectations. The market is pricing 60bps of cuts over next year. He is going to have to do a lot more work to get NZD down. He can't just keep meeting market expectations and expect NZD to depreciate. On top of that, he can't just keep presenting "downside risks" to his rate path forecasts and expect NZD to depreciate.

The central bank is fighting commodity inflows, stronger growth (supported by migration) and the risk on environment all supporting kiwi. NZD is trading as a high yielding, high beta, commodity asset class proxy (not just dairy). Central banks globally are finding it increasingly difficult to shock currency markets in an intended direction. When the global macro back drop clearly implies appreciation for a given currency, central banks are going to have a hard time fighting that with tired and outdated policy tools.

Simple verbal intervention and steady policy rate adjustments are not enough for markets that are numb following swathes of unconventional stimulus over the last seven years. Yield curves are flatter and FX weakening policy room is lower (and working with diminishing returns).”