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The RBNZ kept the OCR steady at a record low of 1.75%. And as a result, the Kiwi got dumped really hard across the board. Wait, what? Why?

What did Wheeler have to say? Well, time to find out!

So, without further ado, here are the key highlights from the RBNZ’s February Monetary Policy Statement, as well as RBNZ Guv’nah Wheeler’s presser.

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

RBNZ held OCR steady

As mentioned earlier, the RBNZ kept the OCR steady at a record low of 1.75%. The RBNZ justified this decision by highlighting the unusual persistence of weak tradable inflation, namely because of the strong Kiwi, which makes imports relatively cheaper, thereby applying deflationary pressure on CPI.

In addition, keeping rates low will help stimulate activity in the economy, and “This will generate increasing capacity pressure and contribute to higher non-tradable inflation,” offsetting the weakness from tradable inflation.

With regard to growth projections, the RBNZ’s growth projections were largely unchanged from the previous November forecasts.

RBNZ Growth Projections
RBNZ Growth Projections (Click to enlarge)

CPI, meanwhile, is expected to slightly weaken in 2017, “reflecting volatility in fuel prices and the high exchange rate.” CPI projections beyond 2017 were largely unchanged on a quarter-on-quarter basis, though.

Meanwhile, the year-on-year projections show that CPI was expected to reach the RBNZ’s median target of 2.0% by Q2 2019. In contrast, CPI was expected to reach 2.0% by Q4 2018 during the November Monetary Policy Statement. The expected slower path to 2.0% is due to the reasons for the expected dip in 2017.

RBNZ CPI Projections
RBNZ CPI Projections (Click to enlarge)

RBNZ now has a neutral bias

If you can still remember my write-up for the November RBNZ statement, I mentioned back then that the RBNZ was communicating that it was less likely to cut.

However, I also quoted Wheeler as saying during the presser that “there’s [still] a 20% probability of a further cut” built into the RBNZ’s projections for the future path of the OCR. The RBNZ therefore still had a slight easing bias but was not very willing to ease further.

Well, for the February RBNZ statement, Wheeler blatantly said that the RBNZ now has a neutral policy bias when he said the following during the presser (emphasis mine):

What we’ve adopted is pretty much a neutral bias, if you talk about bias and stance of monetary policy. If you go back to November, we had an easing bias, a slight easing bias built into the forecast because we had a 20% probability of a further OCR cut built in. Now, we’ve removed that. And we’re, in essence, saying that if you look at the risks around an OCR increasing or decreasing, we think that they’re evenly balanced.”

Market’s rate hike expectations “a bit ahead”

A journalist noted that the market has priced in a rate hike from the RBNZ, with some expecting the rate hike to come as early as this year. The journalist then asked the following question:

“Are they [the market] ahead of themselves or is the [market’s] OCR track realistic?”

And Wheeler answered as follows (emphasis mine):

“Well, the market often likes to get out in front and lead and was suggesting to us that we should drive the interest rate towards zero and now they’re suggesting that we should be quick to raise rates so we think the market’s assessment has gotten a bit ahead of itself at this time.”

In more straightforward (but not so polite) terms, Wheeler is saying that the market’s rate hike expectations are wrong. Take that market!

OCR to stay low for a long while, but…

Wheeler clearly said that the RBNZ now has a neutral bias and he also thinks that the market “has gotten a bit ahead of itself” with regard to expectations for an RBNZ rate hike. Furthermore, Wheeler also said in his prepared press statement that:

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

But Wheeler also later said during the presser that if New Zealand’s economy progresses as expected, “then over time, in perhaps two years or more out … OCR increases may be needed, and we’ve built one increase over that time.”

And looking at the RBNZ’s February Monetary Policy Statement, it looks like the RBNZ expects to hold the OCR steady for a while until the latter half of 2019 at the earliest.

RBNZ OCR Projections
RBNZ OCR Projections (Click to enlarge)

Wheeler stressed that the RBNZ’s projections are “always highly conditional,” though, because of, again, numerous uncertainties in the global arena.

Uncertainty, uncertainty everywhere, yo!

Wheeler noted that indicators of uncertainty have been showing that “uncertainty has been picking up in the last few months.” Wheeler noted that Brexit (among others) was a major uncertainty, but with regard to New Zealand, Trump-related risks and China’s debt positions are the major sources of uncertainty.

Wheeler specifically singled out Trump’s “protectionist” trade policy as the biggest risk of all, not just to New Zealand, but to the global economy. And he cited the U.S. withdrawal from the Trans-Pacific Partnership or TPP (New Zealand is also a signatory) under the Trump administration as an example.

Wheeler explained that Trump’s policies would cause global trade to be more expensive, especially if other countries retaliate by slapping high tariffs against the U.S. This would, in turn, result in a slowdown in global growth. And New Zealand would be hit hard because it has an export-oriented economy.

RBNZ still thinks the Kiwi’s too strong

As usual, Wheeler complained in his prepared speech that the Kiwi is still too strong, saying that:

“The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.”

For reference, the RBNZ forecasted during the November Monetary Policy Statement that the Kiwi’s trade-weight index (TWI) would slide lower to around 76.8 by the end of December 2016 and then slide further to 76.4 by the end of March 2017.

Unfortunately for the RBNZ, the TWI stood at 77.7 by the end of December. Worse, the TWI stood at a very lofty 78.95 today, even after getting dumped across the board. The RBNZ was even forced to change its forecast for March 2017 from 76.4 to 79.0. Still, the RBNZ expects the TWI to slowly sink lower after that.

RBNZ TWI Projections (Click to enlarge)
RBNZ TWI Projections (Click to enlarge)

The RBNZ attributed the Kiwi’s persistent strength to higher commodity prices, as well as “New Zealand’s positive growth outlook” and “low global interest rates relative to those in New Zealand.”

Basically, the RBNZ is saying that the Kiwi is strong because of the constant search for higher yet relatively safe yields in a low-yield world.

However, the RBNZ is hopeful that global economic conditions would improve, and the “corresponding narrowing of interest rate differentials is assumed to lead to a gradual depreciation of the New Zealand dollar TWI.”

RBNZ no longer thinking about intervention

Late into the presser, Wheeler was asked (as usual) if the RBNZ has considered intervening in the forex market, given that the Kiwi is still pretty strong and has proven the RBNZ’s lower projections for the TWI wrong time and time again.

Recall that in the November RBNZ presser, Wheeler said that the RBNZ had “an open mind” on intervention. Wheeler also admitted that intervention was discussed during the policy meeting. This was a shift from his usual evasive answers.

But in the February RBNZ presser, Wheeler returned to his usual stance, saying only that the RBNZ does indeed look at the criteria for intervening, but that he won’t be telling where those criteria currently stand.

Final Thoughts

The RBNZ was widely expected to keep rates steady, so why did the Kiwi tank across the board? Well, as I mentioned earlier, a journalist noted that the market was expecting the RBNZ to have a hiking bias, with some expecting a rate hike as early as this year. Although most economists were apparently projecting a rate hike by 2018, thanks largely to higher inflation expectations.

But as I showed you earlier, it turns out that the RBNZ wants to keep the OCR steady for a long while. Also, the market is “a bit ahead” of itself, according to Wheeler. Not only that, the RBNZ’s own projections showed that a rate hike can only be expected by late 2019 at the earliest, which is way later than what the market has already priced in.

To summarize, the market has been betting heavily that the RBNZ would have a more hawkish tune while signaling a future rate hike in the near future. However, the RBNZ explicitly spelled out that it had a neutral bias. Moreover, the RBNZ also said that it plans to keep the OCR low for a long time before considering a hike in late 2019, which is much later than already priced. As such, very disappointed rate hike junkies likely dumped the Kiwi across the board.