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The RBNZ announced a widely expected rate cut, slashing the OCR by 25 bps to 2.00%, which sent the Kiwi higher across the board before slowly giving back its gains.

What’s up with this wonky price action? And what are the major points from RBNZ Guv’nah Wheeler’s statement and presser? Well, read on and find out!

RBNZ still not worried about growth

The RBNZ was not really that worried about domestic growth since it expects that growth will be fueled by “strong inward migration, construction activity, tourism, and accommodative monetary policy.”

Not only that, the RBNZ even upgraded its growth forecasts. Annual GDP growth for 2017 and 2018 was revised higher from 3.2% and 3.0% respectively to 3.4% for both. The GDP projection for 2019, meanwhile, was upgraded from 2.1% to 2.6%.

RBNZ August GDP Forecasts
RBNZ August GDP Forecasts
RBNZ June GDP Forecasts
RBNZ June GDP Forecasts

The RBNZ is still concerned about the dairy sector, though, saying that “low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment.”

RBNZ still worried about inflation

The RBNZ is still grappling with New Zealand’s inflation problem and even downgraded its inflation forecasts. Annual CPI is expected to grow by 1.1% in 2017 (1.5% originally) and 1.7% in 2018 (2.1% originally). The forecast for 2019 was upgraded from 1.9% to 2.1%, though.

RBNZ August CPI Forecasts
RBNZ August CPI Forecasts
RBNZ June CPI Forecasts
RBNZ June CPI Forecasts

Wheeler clarified during the presser that New Zealand’s CPI is split roughly 50-50 between non-tradables and tradables inflation. And he added that New Zealand doesn’t have a problem with non-tradables inflation, which is inflation from goods and services for immediate domestic consumption and/or are not affected by international competition (e.g. utilities, rent, insurance).

However, New Zealand DOES have a problem with tradables inflation, which has been negative for four years running. And Wheeler attributed this to lower global inflation and the stronger Kiwi, which has made imported goods relatively cheaper, thereby depressing overall inflation. But as Wheeler admits, “we [the RBNZ] can’t do much about tradables inflation.”

Views on the Kiwi dollar

Wheeler also complained that the Kiwi’s trade-weighted index (TWI) is “significantly higher than assumed in the June Statement.” For reference, the RBNZ was expecting the TWI to steadily slide lower to around 71-72, but it stood at a lofty 77.05 as of today.

Wheeler cited “Weak global conditions and low interest rates relative to New Zealand” as the reasons for the Kiwi’s strength. Basically, he’s saying that investors are looking for a higher yet relatively safe yield, and the Kiwi fits the bill.

And as I highlighted earlier, the RBNZ is blaming Kiwi’s strength as one of the reasons why New Zealand has a persistent inflation problem. It’s, therefore, no surprise that Wheeler repeated his mantra that “A decline in the exchange rate is needed.”

Moving on, Wheeler was asked during the presser if he was expecting the Kiwi’s rally shortly after the rate cut. And Wheeler replied by saying that “to be frank, nothing really surprises me too much in these global financial market reactions.” Right…

Anyhow, the idea of intervening in the forex market was also brought up. But Wheeler told. journalists to talk to the hand by saying that “let me not comment further at this point about whether we’re intervening or not.” Hmm. Very interesting.

As I noted in my write-up on the June RBNZ statement (read it here), the intervention was also brought up back then, but Wheeler was quick to dismiss it and even voluntarily added that the RBNZ only has a limited ability to intervene.

But now, Wheeler didn’t give a straight answer to the question. Makes you wonder if the RBNZ is getting desperate enough to attempt an intervention, doesn’t it?

More housing market woes

The RBNZ was already very worried about the housing market, as revealed in the July economic update:

“House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability. The Bank is currently consulting on stronger macro-prudential measures aimed at mitigating risks to financial stability from the current boom in house prices.”

And in the August statement, Wheeler retained that worry, by saying almost exactly the same thing:

“House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability. The Bank is consulting on stronger macro-prudential measures that should help to mitigate financial system risks arising from the rapid escalation in house prices.”

One more takeaway from the August statement is that the RBNZ apparently did not finish consulting on the proposed macro-prudential tools that were meant to cool down the housing market.

More rate cuts?

In the June statement, Wheeler said that (emphasis mine):

Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”

For the August statement, Wheeler copied the more forceful rhetoric from the RBNZ’s economic update by saying that (emphasis mine):

“Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.”

Wheeler was also asked during the presser if a 50 bps cut was even considered during the meeting. And Wheeler answered that “No, no serious consideration” because the RBNZ “did not think it was justified.” As to why it was not justified, Wheeler cited New Zealand’s robust economic growth and continued expectations of growth.

RBNZ wants banks to pass on rate cuts

According to some reports, private retail banks like ANZ and Westpac only pass on around 5 to 10 points whenever the RBNZ cuts the OCR by 25 basis points. Not only that but retail banks also usually increase their deposit rates.

This means that retail banks can borrow cheap money from the RBNZ, but the interest that they charge on retail loans don’t go that much lower, which is a great deal for the retail banks, but not so much for the borrowers (or the RBNZ for that matter).

And since these banks don’t pass on the lion’s share of the rate cuts to borrowers, which include embattled dairy farmers, these retail banks are actually adding to the RBNZ’s headaches in not giving the dairy sector a break.

In addition, cheaper money from the RBNZ allows the retail banks to buff up their own competitiveness by offering higher deposit rates. This naturally attracts more savers AND foreign investors, which drives up demand for the Kiwi all the more.

To summarize, this lack of pass-on effect is probably one of the major reasons why the RBNZ’s rate cuts don’t seem to be all that effective in curbing Kiwi’s strength or helping the dairy sector. Although this lack of pass-on effect is also somewhat good in that rate cuts don’t really pump as much air into New Zealand’s housing bubble.

Anyhow, this issue was brought up during the presser. And Wheeler replied that “We would like to see most of it passed on,” but in the end, “it’s up to the banks to make those judgments.”

After the presser, New Zealand’s PM, John Key, tried to defend the private retail banks by saying that:

“It’s kind of an easy thing to beat up on the banks, but I think for the most part they have generally been offering much lower levels of fixed rate mortgages to consumers, you can now borrow at money at the very low four percents.”

Finance Minister Bill English had a more combative tone, however:

“The borrowers have the opportunity to change banks, to ring up their bank and demand a lower interest rate, if that is what they want to do. My understanding is that banks are responding to that kind of pressure from customers all the time”

Putting it all together

The rate cut was widely expected, so the Kiwi reacted by dipping a bit on the rate cut decision before rallying hard across the board.

NZD/USD: 15-Minute Forex Char
NZD/USD: 15-Minute Forex Chart

However, the RBNZ, via Guv’nah Wheeler, had a mixed view of New Zealand’s economy. On the one hand, New Zealand’s economic growth is robust, and the RBNZ even upgraded its growth forecasts.

On the other hand, inflation remains weak, and the RBNZ was forced to downgrade its inflation projections to boot.

Wheeler also said that further easing “will be required,” but given that the potential housing bubble has apparently not yet been resolved, as well as the admitted fact that the RBNZ didn’t consider cutting deeper during the recent meeting, it appears as if the RBNZ may be very reluctant to cut further.

And as revealed during the presser and by other reports, retail banks don’t actually pass on most of the rate cuts and they even raise their deposit rates, which attracts more investors. And this is likely one of the primary reasons why the RBNZ’s rate cuts don’t have a lot of “oomph” when it comes to weakening the Kiwi or supporting the dairy sector.

Wheeler also avoided answering the question on the possibility of intervention, when he usually dismisses such questions right away. This may or may not be a big thing, but it’s still worth noting.

In any case, the Kiwi’s climb was quickly capped and it has been sliding lower at a grinding pace ever since, so the RBNZ’s forward guidance seems to be having an effect… for now.