The Reserve Bank of New Zealand meets on Thursday to discuss the future of monetary policy. The bank is widely expected to leave to the official cash rate at 3.5% but the details of Governor Wheeler’s accompanying notes and the RBNZ’s latest Momentary Policy Statement (MPS) are less certain. This could result in some choppy action in the kiwi following this month’s policy meeting.
Will the RBNZ switch to a more dovish bias?
In January the RBNZ completely dropped its tightening bias and introduced the idea of rate cuts. The bank didn’t specifically state that it was looking at lowering the official cash rate, but it did imply that rates could move in either direction. This means that the RBNZ is on data watch as it keeps an eye on house prices, the strength on the economy and kiwi, and global economic conditions.
Considering the robustness the NZ economy is still showing, we think it’s unlikely that the RBNZ will use this month’s meeting to introduce a more dovish stance on the rates. Not enough has changed domestically since the RBNZ last meeting to justify materially altering its outlook on interest rates.
Macro-prudential tools to lessen the need for tighter monetary policy
However, the RBNZ is looking at introducing macro-prudential tools to help put a cap on house-price inflation. The bank said it was looking into ways to tighten rules around lending for residential property investors by targeting rental properties. It is looking at making property investment an class of its own, as opposed to the current regime that doesn’t differentiate between owner-occupiers and rental properties. Also, the definition of ‘investor’ appears to be under scrutiny, with the RBNZ dumping the prior criteria that defines an investor as those that own five houses or more. The new definition is unclear, but it’s likely to encompass many more people than the current criteria, thereby multiplying the effect of any restrictions on residential property investment.
The threat of a housing bubble was the main reason behind the RBNZ’s decision to increase the official cash rate by 100 basis points last year (from 2.5% to 3.5%). Once this threat is removed, the RBNZ can focus more on supporting the broader economy, greatly reducing the bank’s impetus to tighten monetary policy.
The decision by the RBNZ to focus on the use of non-rate based tools to cool the property market has been a major thorn in the kiwi’s side. By removing the need for tighter monetary policy in NZ, the NZ dollar lost the potential for further yield advance over other currencies. This story may have further to play out if the RBNZ turns more bearish than expected, but it isn’t our base case, at least not in the near-term.
At present, the market appears to be banking on a slightly more dovish tone from the RBNZ at this week’s policy meeting, possibly highlighted by revised forecasts in the MPS. We don’t subscribe to this notion, as we think the RBNZ has said its piece on rates and macro-tools and it will choose to maintain the status quo on Thursday, although we do expect to see a more downbeat tone from the bank when describing the global economy. Overall, we are mildly bullish NZD in the immediate aftermath of tomorrow’s meeting.