By Roger J Kerr
The RBNZ’s annoying habit of underwhelming the prior financial market expectations in their various monetary policy statements has consistently propelled the NZ dollar higher over the last 12 months.
Inflation has also been consistently lower than RBNZ forecasts all year, largely due the TWI currency value being substantially above the lower TWI assumption the RBNZ apply to their economic and inflation forecasts.
The pattern of unjustified RBNZ caution in cutting interest rates has to be broken, otherwise the Governor could be up for a serious job performance/appraisal review for consistently missing the 1% to 3% inflation target band.
The late July special economic update from the RBNZ, coupled with the tightened LVR rules on residential investment properties, appeared to pave the way for aggressive interest rate reductions to turn the appreciating tide of the Kiwi dollar.
Unfortunately, the two RBNZ statement since then (the MPS on 11 August and the Wheeler speech last week) have seen the RBNZ return to their overly-cautious mode and a higher NZ dollar has been the result.
There seems little downside to me for the RBNZ to now surprise the markets with another 0.25% OCR cut at the next review date on 22 September.
The scheduled OCR review date is one day after the US Federal Reserve FOMC meeting on 21 September where there is a greater than 50/50 chance of a 0.25% interest rate hike in the US.
Governor Wheeler will have the opportunity to turbo-boost a lower NZ dollar exchange rate from the expected strengthening of the US dollar over the next month.
If the RBNZ is really serious about returning inflation to above 1.00% and closer to 2.00% over the next 12 months, the market opportunities to drive the NZ dollar lower need to be taken, it is over to you Graeme!
Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com