As expected, the RBNZ kept the OCR steady at a record low 1.75%. There was no press conference, however, which is a bummer. Anyhow, here are the takeaways of the March RBNZ statement that you may wanna know about.
1. RBNZ optimistic on growth
The RBNZ acknowledged that Q4 2016’s GDP growth was weak. Even so, the RBNZ remains upbeat, since the RBNZ thinks that “some of this [weakness] is considered to be due to temporary factors.”
I’m not really sure what “temporary factors” the RBNZ is referring to, though. In the RBNZ’s February Monetary Policy Statement, the RBNZ warned that the 7.8 magnitude earthquake that rocked New Zealand on November 14, 2016 would likely have “a small, temporary, impact on the housing market.” And that was apparently the case since construction output in Q4 2016 only increased by 1.8% quarter-on-quarter, which is slower than the 2.0% increase in Q3. Other than that, though, the RBNZ wasn’t really expecting other “temporary factors” to slow down GDP growth.
Also, as I noted in my most recent Economic Snapshot for New Zealand, the weak GDP growth was due primarily to the 1.56% slump in manufacturing output, which subtracted 0.16% from GDP growth. And if you look at the Q4 GDP report, the fall in manufacturing output was actually widespread, but not broad-based, since 4 of the 9 manufacturing industries printed a contraction in output.
Anyhow, the RBNZ also reiterated that its overall positive outlook for growth is “supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.”
Kinda interesting that there was no mention of the fact that household spending only increased by 0.4% quarter-on-quarter in Q4, a drastic slowdown from Q3’s +1.4%, as well as marking the second consecutive quarter of weakening household spending after peaking at +2.1% back in Q2 2016.
2. Inflation expected to be “variable”
The RBNZ happily noted that the latest reading for headline CPI was already within the lower bound of its 1-3% target band for inflation, “as past declines in oil prices dropped out of the annual calculation.” However, the RBNZ warned that inflation “will be variable over the next 12 months due to one-off effects from recent food and import price movements.”
Variable, huh? Looks like the inflation could either accelerate further or decelerate. Still, the RBNZ optimistically expects that CPI will “return to the midpoint of the target band over the medium term.”
3. Kiwi still too strong
The RBNZ was pleased that the Kiwi’s trade-weighted index “has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials.” However, the RBNZ still thinks that the Kiwi is too strong, adding that “further depreciation is needed to achieve more balanced growth.”
4. RBNZ in no rush to switch bias
The RBNZ repeated its neutral monetary policy bias, saying 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.”
Overall, the RBNZ’s monetary policy stance was still neutral. Forex traders who were expecting him to sound a bit more dovish in order to support growth were left empty handed because the RBNZ thinks the slowdown in Q4 was just due to “temporary factors.” Although it’s not really very clear what these temporary factors are, and the RBNZ didn’t really elaborate. Also, the RBNZ just shrugged off the drastic slowdown in household spending.
Meanwhile, forex traders who were expecting the RBNZ to be a little bit more hawkish because of the rapid increase in inflation, also didn’t get to see what they wanted to see, since the RBNZ just said that inflation “will be variable over the next 12 months.” No details on that as well, though.
Anyhow, the RBNZ’s decision to maintain its neutral monetary policy bias very likely enticed both bullish and bearish speculators to jump ship, since the Kiwi tossed and turned in both direction without really going anywhere for several minutes after the RBNZ statement. After that, the Kiwi’s price action began to diverge, which likely means that forex traders lost interest on the Kiwi, since opposing currencies were now dominating the price action on Kiwi pairs.