3 Reasons Why the RBNZ Might Cut Rates Soon

Don’t say I didn’t warn y’all, but my gut tells me that the Reserve Bank of New Zealand (RBNZ) might cut interest rates soon. Governor Graeme Wheeler and his boys have a monetary policy statement scheduled at 10:00 pm GMT on Wednesday so I’ll share with you these reasons why they might take a dovish stance.

1. RBNZ announced plans to curb housing inflation

housing inflationAs my buddy Pip Diddy briefly discussed a few weeks back, the RBNZ already announced its plans to impose lending restrictions in order to curb housing inflation. You see, the strong surge in home prices in New Zealand’s cities has been one of the factors preventing the central bank from going all out with monetary policy easing since this could stoke a property bubble in the country.

In their Financial Stability Report, the RBNZ gave further details on their loan restrictions for property investors in Auckland, requiring a larger downpayment and preventing potential home-buyers from taking too much advantage of cheaper mortgage rates. I don’t know about you, but it seems that the central bank is trying to isolate the housing market from any increases in price levels that could be spurred by a rate cut. In other words, they could be able to decide to ease monetary policy anytime without having to worry about a housing bubble!

2. Dairy industry has been unable to recover

In contrast to the housing sector which is getting too hot to handle, New Zealand’s dairy industry has been chillin’ like a couch potato. The country’s global dairy trade auction has been recording consecutive price declines since mid-March, prompting Fonterra to downgrade their milk payout forecasts for farmers and volume estimates for the next twelve months.

If you’re wondering why this is such a big deal, then lemme tell you that milk and other dairy products (cheese, butter, whipped cream – all the good stuff!) account for roughly a third of New Zealand’s export activity, which then contributes 30% to overall economic growth. Not only is Fonterra a leading multinational dairy corporation but it also happens to be the largest company in New Zealand and the world’s top dairy exporter.

As of this writing, milk prices are down by nearly 40% from last year, as demand has weakened and producers are running close to having an oversupply. RBNZ Governor Wheeler has repeatedly mentioned that another year of falling dairy prices would be a huge concern for their economy so policymakers might be inclined to add fresh stimulus.

3. Economists have been calling for rate cuts

Thanks to the country’s bleak employment report for the first quarter of the year, forex market analysts renewed their calls for an RBNZ interest rate cut. According to economists over at ASB Bank Ltd. and Deutsche Bank AG, the RBNZ is likely to ease monetary policy due to weak wage growth weighing on the country’s inflation outlook.

As I’ve mentioned in my review of the New Zealand quarterly jobs report, even though a few underlying labor components showed green shoots, the slow pickup in wages will make it more difficult for the central bank to achieve its inflation targets. Apart from that, without any increase in their salaries, workers are likely to refrain from spending their hard-earned cash. This could lead to a double-whammy of feeble inflation and lackluster growth – something that the RBNZ would want to avoid like the plague.

An RBNZ interest rate cut ain’t set in stone yet, though! Just as in their previous statements, policymakers might still decide to sit on their hands for the time being and wait for more signs of a slowdown before pulling the easing trigger. In that case, stay on the lookout for any dovish hints or jawboning remarks that could keep the Kiwi’s forex wings clipped.

 

  • ForExchange

    Hi Forex Gump,

    I absolutely agree with everything you have written. NZD/USD already made nice gains last year, my best bet would be go long either with GBP/NZD or EUR/NZD. These have a lot of potential.

    What do you think?

    FE

    • That was a pretty huge gap up for GBP/NZD, hope you traded that one! I’m still not sure about EUR/NZD (maybe because I suspect one negative announcement from Greece anytime now could erase all those gains instantly, but that’s just a personal bias) but the economic data from the euro zone does support further gains. AUD/NZD made a nice rally too, breaking above that daily inverse hns pattern neckline just now.

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