Tomorrow at 9:00 pm GMT the Reserve Bank of New Zealand (RBNZ) will publish its monetary policy decision for the month of June.
Since RBNZ head honcho Graeme Wheeler won’t be conducting a presser this time, it’s more important to pay attention to the actual statement.
Here are three points you should know before you trade the event!
1. RBNZ kept calm and carried on
If you recall, the RBNZ kept its interest rates unchanged at 1.75% as expected in May. More importantly, the central bank stuck to its neutral bias like white on rice.
See, analysts were expecting Wheeler and his gang to be a bit more hawkish after New Zealand’s headline inflation increased sharply in Q1 2017.
Instead, the central bank downplayed the increase, saying that the surge was “mainly due to higher tradables inflation, particularly petrol and food prices” and that “these effects are temporary.”
RBNZ also noted that “non-tradables and wage inflation remain moderate but are expected to increase gradually.”
Overall, though, the central bank still expects headline inflation to hit the midpoint of the target band over the medium-term and hit around 2.0% over the long-term.
And as if shrugging of high inflation wasn’t enough, the RBNZ also:
- Downgraded Q2 2017’s growth forecasts on the back of weaker wage growth (and therefore consumer spending); lower capital formation, and temporary weakness in exports for 2017.
- Expected a weaker currency (NZD)
- Kept its rate hike projections unchanged. That means no rate hike until H2 2019!
You can read our May decision highlights if you want to sink your teeth into the details.
2. No policy changes in June?
Much like last month, market players expect the central bank to keep its interest rates unchanged at 1.75%. But that doesn’t mean you should expect a non-event from the release!
On one hand, the RBNZ will have to recognize the improvement in economic growth that’s led by faster milk production, as well as better manufacturing and export conditions.
On the other hand, it would also want to temper rate hike expectations by highlighting the lack of growth in underlying inflation, limited capital formation, and the possible effects of a stronger-than-expected local currency (TWI is at 78.10 today, higher than the RBNZ’s expected 76.0 for June).
But it’s likely that RBNZ has already given us all the clues we need to guess their bias this month. In last month’s statement, it highlighted that:
“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.”
This means that the central bank would likely keep its neutral stance for another month this week.
3. Possible NZD reactions
Since market players braced themselves for a more hawkish tone, last month’s neutral bias took Kiwi bulls by surprise. As a result, NZD dropped lower and stayed low for the rest of the day. Yipes!
This time around there’s no big report that supports a hiking bias from the central bank. If the RBNZ does decide to keep its neutral pants on, then we’ll likely see limited reaction from the Kiwi.
But if Wheeler and his team decide to jawbone the Kiwi (more than the usual) or ever so slightly hint at an easing bias down the road as they did last month, then we could see profit-taking from the Kiwi’s uptrend from the last couple of days.