The RBNZ announced that it kept the OCR unchanged at a record low 1.75% as expected. And while there was no press conference, there was enough meat on the RBNZ’s official press statement for forex traders to chew on.
And so the Kiwi got pushed higher as a result. So, what did the RBNZ explicitly and implicitly say in the latest RBNZ statement?
1. RBNZ had a soft tone on stronger NZD
The Kiwi’s trade-weighted index (TWI) stood at 78.19 yesterday and 78.39 today. These are very lofty numbers compared to the RBNZ’s forecast that the TWI will fall further to 76.0 by the end of June.
Even so, the RBNZ only stated the following (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.”
What should be noted here is that there’s no sense of urgency or worry in the RBNZ’s tone, which implies that the Kiwi’s recent strength is still acceptable to the RBNZ and not enough to put the hurt on New Zealand’s export-oriented economy.
And to emphasize this, compare the RBNZ’s June statement above to the RBNZ’s March statement below (emphasis mine).
“The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.”
See the difference in tone?
2. RBNZ downplayed slow Q1 GDP growth
I pointed out in my most recent Economic Snapshot that New Zealand’s quarter-on-quarter growth of +0.5% in Q1 2017 is way below the RBNZ’s forecast of +0.9%.
In addition, the year-on-year reading of +2.5% is the slowest annual rate of expansion in five quarters and missed the RBNZ’s forecast of +2.9% to boot.
The RBNZ also noted this slowdown, but instead of sounding dovish because of it, the RBNZ had this to say:
“GDP growth in the March quarter was lower than expected, with weaker export volumes and residential construction partially offset by stronger consumption. Nevertheless, the growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade. Recent changes announced in Budget 2017 should support the outlook for growth.”
It’s therefore pretty clear that the RBNZ is still optimistic on growth, despite the slowdown in Q1.
Also worth noting is that the RBNZ referenced New Zealand’s 2017 Budget. The 2017 Budget contains several fiscal measures meant to boost consumer spending, such as a tax reductions for New Zealand’s two lowest tax brackets. As such, the RBNZ is heavily implying here that it expects consumer spending to strengthen further and support growth.
3. RBNZ maintained neutral policy bias
During the presser for the May RBNZ statement, a journalist asked RBNZ Guv’nah Wheeler if the RBNZ maintained its neutral monetary policy bias.
And Wheeler answered as follows (emphasis mine):
“Yeah, we’re neutral on monetary policy and, you know, for the foreseeable future we would expect the OCR to remain at its current level.”
And in the June RBNZ statement, the RBNZ had this to say on monetary policy.
“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”
This statement is actually a word-for-word copy of the RBNZ’s official press statement in May, the one which the journalist asked for clarity on. It’s therefore a near certainty that the RBNZ maintained its neutral policy bias in June.
And as a refresher, the RBNZ doesn’t want to budge from its neutral stance because:
“Premature tightening of policy could undermine growth, causing inflation to persistently undershoot the target midpoint. Further policy easing, in an attempt to see non-tradables inflation strengthen more quickly, would risk generating unnecessary volatility in the economy.”
The RBNZ normally tries to talk down the Kiwi when the Kiwi’s TWI goes above RBNZ’s forecasted levels. During the June RBNZ statement, however, the RBNZ refrained from doing that, even though the Kiwi’s TWI is already well above the RBNZ’s own forecast.
This lack of jawboning on the RBNZ’s part very likely surprised forex traders who were expecting the RBNZ to talk smack about the Kiwi.
Also, this lack of jawboning was probably taken as a sign by the Kiwi bulls to charge in. And all the more so, given that the RBNZ maintained it neutral policy bias while downplaying the slowdown in Q1 GDP growth and presenting an optimistic outlook.