The Fellowship of the Com-doll Ring

Everyone, even that little hobbit Frodo, expects that the bank will stick to its commitment of holding interest rates steady at 2.50%. Remember, in one of the banks rate announcements this January, the RBNZ promised to keep rates unchanged at until the middle of this year.

According to the bank, the country’s economic fundamentals remain weak, and that even if there were some signs of life here and there, the improvements were far from what the bank wanted. According to Alan Bollard the Wise, the RBNZ’s top wizard, the bank needs to see first whether the economy could sustain itself before they can even think about hiking rates.

A quick look at recent economic data seems to support Bollard’s statement. One clear account pointing to this is New Zealand’s fourth quarter CPI figures. Prices last winter (or was that summer in New Zealand?) unexpectedly fell by 0.2%, putting the annualized figure to 2%, which was well within the central bank’s 1-3% inflation target band. Moreover, inflation expectations in the March quarter remained steady at 2.7%.

To make matters worse, retail sales did not grow in December, which was quite odd since this was supposedly one of the strongest months in the business cycle. Meanwhile, January sales are only expected to have grown by a measly 0.3%.

With the country’s unemployment rate soaring to its highest level in a more than a decade, it is unlikely that the bank will raise rates. Take note that one way to keep the unemployment rate in check is to make the financial markets more liquid. With more access to cheaper funds, this can help firms expand their businesses, which in turn can lead to more hiring down the road.

The only factor going for a possible rate hike is the pressure on the RBNZ to keep up with its Australian counterpart, the RBA, which again raised its rates by 25 basis points to 4.0%. However, I don’t think the bank will pay much focus on that given their still frail economy.

Today’s RBNZ rate decision could be a non-event since the central bank has already committed to steer clear of rate hikes until mid-2010. Still, a surprise rate hike could send the Kiwi soaring like Legolas’ arrow towards the 0.7200 gateways.

Without a rate hike, much of the price movement would likely be driven by the accompanying RBNZ statement more than the rate decision itself. Recall that last January, Bollard cautioned about weak spending and the deterioration in the labor market, forcing the Kiwi to lie low and close to the ground like Gimli.

This time, a hawkish speech from their central bank head could provide support for the Kiwi, despite the recent slump in economic figures. However, if Bollard focuses on the current weaknesses of New Zealand’s economy and hints that future rate hikes may take longer than expected, the Kiwi could slide down and retest its recent lows.

As I’ve pointed out earlier, it doesn’t seem like we’ll hear any rumors of interest rate increases similar to what we heard from fellow com-doll nations Australia and Canada. Unlike Australia, New Zealand didn’t avoid a technical recession in 2009. In addition, Australia’s labor situation has also been posting some sweet surprises, indicating that their economy could be on an upswing.

Furthermore, in contrast to Canada, New Zealand isn’t getting any signals of rapid growth or inflation. Remember, even though the Bank of Canada said that they would keep rates steady until June this year, traders believe that we could be in for a possible rate hike before then. With no clear evidence for the RBNZ to hike their own rates, we will just have to take a “wait and see approach” until New Zealand can join the “Fellowship of the Com-Doll Ring.”