Wondering why the Kiwi rallied after the RBNZ interest rate statement? Check out what Governor Wheeler and his men had to say in order to figure out if the Kiwi can go for more forex gains:
1. No need for rate cuts!
While most of the other central banks are holding on to an easing bias, the RBNZ decided to stick to its neutral stance in saying that their current monetary policy is appropriate. Aside from saying that they aren’t thinking about easing anytime soon, policymakers added that they are likely to maintain a period of stability in interest rates, possibly for the next two years.
However, Wheeler emphasized that future interest rate adjustments could either be up or down, depending on how economic data turns out. Judging from his current economic assessment and outlook, it seems that the chances of seeing a rate cut in the coming months are very slim.
2. Upbeat growth forecasts
For one, Wheeler sounded optimistic about the country’s economic performance, pointing out that growth is keeping up a strong pace of 3.25% to 3.5% so far and might carry on at this rate for the next few years. “Our situation is quite different from some of those countries that have changed monetary policy or cut interest rates,” he explained.
RBNZ policymakers projected that the economy would expand by 3% in the first quarter of this year then accelerate to 3.8% GDP growth in the first three months of 2016. Wheeler highlighted the strength the domestic economy, as lower gasoline prices and the influx of immigrants have boosted consumer spending.
3. Not worried about weaker inflation
When it comes to inflation, Wheeler admitted that downside risks remain and that annual CPI could actually fall to zero this quarter. Central bank officials predict that inflation would stay below its 1-3% target range for the next couple of years.
However, this seems to be the least of their concerns for now, as RBNZ officials focused on the ongoing surge in home prices. In Auckland, home prices have posted a whopping 13% year-over-year increase, spurring a 6.4% jump in housing inflation nationwide. Policymakers are worried that easing monetary policy in order to boost overall inflation might drive home prices higher and create a property bubble.
4. Wheeler says NZD is still overvalued
Did Wheeler pass up the opportunity to jawbone the Kiwi? Hell no! The RBNZ head once again reminded forex market watchers that the New Zealand dollar’s exchange rate is “unjustifiably high and unsustainable” when it comes to the country’s long-term fundamentals. “A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing,” he added.
Even though the RBNZ didn’t exactly drop any hawkish hints in its latest statement, central bank officials seemed less cautious this time around. This suggests that the Kiwi could regain ground against its forex counterparts, such as the Aussie or the euro, whose central banks are still dovish. Do you agree?