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The RBNZ announced that it was keeping the OCR steady at 1.75% in its latest press statement. And the Kiwi reacted by jumping higher initially before tanking later after the RBNZ presser. What’s up with that? Well, here are the key highlights from the August RBNZ statement and presser that you need to know about.

Overlay of NZD Pairs: 15-Minute Forex Chart
Overlay of NZD Pairs: 15-Minute Forex Chart

1. 2018 & 2019 growth forecasts upgraded

The RBNZ acknowledge the weak growth in Q1, but was quick to add that “Growth is expected to improve going forward.”

And looking at the RBNZ’s updated growth forecasts above, the RBNZ’s still expected GDP growth to rebound by 0.9% quarter-on-quarter in Q2 while growth forecasts for the rest of 2017 were essentially unchanged.

Even better, growth forecasts for 2018 and 2019 were all upgraded. And below is the full list of the changes:

  • 2017 June – 0.9% (unchanged)
  • 2017 September – 0.9% (1.0% previous)
  • 2017 December – 1.0% (0.9% previous)
  • 2018 March – 1.0% (0.9% previous)
  • 2018 June – 0.9% (0.8% previous)
  • 2018 September – 0.9% (0.8% previous)
  • 2018 December – 0.8% (0.7% previous)
  • 2019 March – 0.8% (0.7% previous)
  • 2019 June – 0.7% (0.5% previous)
  • 2019 September – 0.7% (0.5% previous)
  • 2019 December – 0.6% (0.5% previous)
  • 2020 March – 0.5% (unchanged)
  • 2020 June – 0.5% (unchanged)
  • 2020 September – 0.5% (new)

The upgraded growth projections reflect an expected recovery in export volumes, “given the recent improvement in dairy production volumes.” Also “The high level of consents, combined with a backlog of work from early 2016, is expected to support growth in residential building in coming quarters.”

In addition, “The elevated terms of trade and rising capacity pressure are expected to support growth in business investment.”

Moreover, “Consumption has been growing at above average rates in recent quarters” and is expected to continue doing so because of “strong population growth, improving confidence, and high terms of trade.”

Consumer spending is also expected to get a boost because New Zealand’s 2017 Budget has several fiscal measures meant to boost consumer spending, such as a tax reductions.

In short, the RBNZ expects GDP growth to accelerate because of stronger consumer spending, exports, and business and residential investments, which is what I also noted in my most recent Economic Snapshot of New Zealand, by the way.

2. Nearer-term inflation forecasts downgraded

Faster growth is nice and all, but the RBNZ downgraded its annual inflation projections for 2017 and 2018, reaching a low point of 0.7% (1.1% previous) in Q1 2018 before steadily recovering again.

A full list of the changes are as follows:

  • 2017 September – 1.6% (2.1% previous)
  • 2017 December – 1.3% (1.7% previous)
  • 2018 March – 0.7% (1.1% previous)
  • 2018 June – 1.3% (1.4% previous)
  • 2018 September – 1.6% (1.7% previous)
  • 2018 December – 1.9% (1.8% previous)
  • 2019 March – 2.0% (1.9% previous)
  • 2019 June – 1.9% (2.0% previous)
  • 2019 September – 2.0% (unchanged)
  • 2019 December – 2.0% (2.1% previous)
  • 2020 March – 2.0% (2.1% previous)
  • 2020 June – 2.1% (2.0% previous)
  • 2020 September – 2.0% (new)

According to the RBNZ, the downgrades reflect the recent weaker-than-expected inflation readings. In addition, “Annual tradables inflation is expected to fall in the near term as past increases in food and fuel prices drop out of the annual calculation. Thereafter, tradables inflation is projected to settle at a below-average level due to persistently low global inflation and the high New Zealand dollar exchange rate.”

However, inflation is expected to steadily recover since “Above-trend GDP growth and an associated rise in capacity pressure [are expected] to underpin [an] increase in non-tradables inflation.”

Oh, for the newbies out there, non-tradables inflation refers to inflation from goods and services for immediate domestic consumption and/or are not affected by international competition (e.g. utilities, rent, insurance). Tradables inflation, meanwhile, refer to the opposite (e.g. imported goods).

Also, New Zealand’s CPI is split roughly 50-50 between non-tradables and tradables inflation. And New Zealand’s inflation problem comes mainly from tradables inflation, which has been negative for several years already but show signs of recovering recently.

3. RBNZ retained neutral bias

RBNZ Governor Wheeler was asked to clarify the RBNZ’s monetary policy bias during the presser. And Wheeler answered as follows:

“We’re still very much in the neutral stage where for the foreseeable future we don’t see the OCR increasing.”

Also, the August RBNZ Monetary Policy Statement reiterated that:

“In the current environment, a premature tightening of policy would risk undermining growth, causing inflation to settle below the midpoint of the target range. On the other hand, an easing of policy, seeking to achieve a faster increase in inflation, would risk generating unnecessary volatility in the economy.”

4. OCR track unchanged

Another thing worth highlighting is that while the RBNZ still has a neutral policy bias, it also still expects to hike during the later half of 2019 at the earliest.

Not all that surprising, I suppose. After all, the RBNZ’s inflation forecasts for Q3 2019 were unchanged at 2.0%, which is the RBNZ’s inflation target. Also, the RBNZ expects inflation to hold steady at around 2.0% beyond that, so it’s only natural that they still have a long-term hiking bias.

A journalist later challenged Wheeler near the end of the presser by first pointing out that tradables inflation “has been the lowest since the depression and that the [Kiwi] has been significantly higher than [the RBNZ] expected.” The journalist then asked if “doesn’t that show that monetary policy has been too tight?

Wheeler countered by pointing out economic growth in New Zealand has been above trend, which is contrary to the idea of a tight monetary policy. After all, tight monetary policy means that credit is harder to come by, slowing growth down.

5. Kiwi too strong!

If you can still remember, the RBNZ didn’t sound too worried about the Kiwi’s strength in its June press statement since it had this to say (emphasis mine):

“The trade-weighted exchange rate has increased by around 3 percent since May, partly in response to higher export prices. A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.”

In its most recent statement, however, the RBNZ changed its language on the Kiwi to sound more urgent (emphasis mine):

“The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar. A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.”

A very noticeable change in sentiment, yeah?

This was emphasized in a later interview with Bloomberg wherein RBNZ Assistant Governor McDermott said that the Kiwi “does need to adjust down.”

6. RBNZ ready to intervene?

In the presser, Wheeler was asked if the RBNZ’s “traffic light system” for currency intervention is giving a go-signal, given the Kiwi’s recent strength. And Wheeler only had this to say:

“We do monitor the, uh, traffic light system very closely… each of the four traffic lights. Look, I won’t comment on whether [the strong Kiwi is] affecting those or not.”

In his testimony before the Finance and Expenditure Select Committee after the RBNZ presser, Wheeler was asked about currency intervention again. And while Wheeler refused to say that there’s a go-signal to intervene, Wheeler was forced to spit out that: “We’ve got a traffic-light system we have used that in the past; we constantly look at what our models suggest and where the exchange rate is, so that’s something that is always open to us.”

And in his interview, McDermott said that the RBNZ’s stronger language on the Kiwi’s recent strength is “a subtle change of language; think about it as the first step” towards currency intervention. So, yeah, intervention is currently on the table.

Final Thoughts

The initial reaction to the RBNZ statement was for the Kiwi to rally, very likely because of relief that the RBNZ maintained its neutral policy bias and even maintained its longer-term hiking bias.

However, the RBNZ’s stronger language on the “need” for the Kiwi to depreciate later caught up to the Kiwi, weakening the Kiwi in the process. This was worsened by the fact that McDermott reiterating in his post-presser interview that there’s “need” for the Kiwi to go down. Also, the Kiwi began to get noticeable selling pressure when Wheeler said that the RBNZ is “always open” to intervening in the forex market to kick the Kiwi lower.

And it was just downhill for the Kiwi from there since risk aversion related to North Korea applied further selling pressure on the higher-yielding Kiwi.