3 Takeaways from the June RBNZ Interest Rate Decision

I hate to gloat but… CALLED IT! As I’ve discussed in one of my articles this week, the RBNZ had a bunch of solid reasons to cut interest rates so they just did exactly that. And it looks like our readers called it, too! Check out the results on our poll asking if the RBNZ might cut rates this month.

rbnz poll

Give yourselves a pat on the back, guys! Governor Wheeler and his gang of policymakers decided to lower their benchmark rate by 0.25% to 3.25% in this week’s monetary policy statement, and here are a few more things you need to remember from the announcement:

1. More interest rate cuts are likely

In his accompanying statement, Wheeler admitted that subdued inflation and lackluster growth were the main factors that led them to decide that a rate cut was necessary. He added that, unlike the BOC surprise easing move earlier this year, their decision to lower interest rates this month isn’t just for insurance but rather a much-needed effort to keep the New Zealand economy on its feet.

“A reduction in the official cash rate is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium-term inflation converges towards the middle of the target range,” he explained. “We expect further easing may be appropriate.” No need to read between the lines here because Wheeler said so himself!

2. Kiwi remains overvalued

One would think that the Kiwi’s non-stop forex slide since late April would be enough for Wheeler to drop his usual spiel on the Kiwi being overvalued. But no! Wheeler said that a lower currency value would be desirable since this could spur export activity and support dairy farmers. In addition, currency depreciation would make imported goods relatively more expensive, eventually pulling domestic price levels higher.

“A further significant downward adjustment is justified,” said Wheeler. “In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.”

That’s a lot of fancy words, but don’t forget that the RBNZ is actually quite capable of walking the talk. Remember when they staged a secret forex intervention trick on the markets to spur Kiwi depreciation a couple of years ago? I wouldn’t be surprised if they’re willing to pull this stunt again!

3. Concerns about weaker inflationary pressures

It looks like the RBNZ isn’t too concerned about stoking a housing price bubble anymore, as policymakers are zooming in on the decline in dairy and commodity prices. Wheeler even ‘fessed up that they didn’t anticipate that the fall in export prices would be THAT bad, but he was also quick to point out that their consecutive rate hikes last year weren’t a mistake.

“The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed” Wheeler pointed out while stressing that their primary objective is to maintain price stability.

With that, forex analysts are pricing in the odds of another RBNZ interest cut in July and probably another one towards the end of this year. From their previous estimate of seeing inflation hit their 2% target by the third quarter of 2017, RBNZ officials revised it to show that the annual CPI might already reach 2.1% by the end of 2016. Factoring in a couple of rate hikes, perhaps?

Let’s see if you guys can make the right call again when it comes to the next RBNZ policy moves. Cast your votes in our poll below!