The Less-Dovish Central Bank

The Reserve Bank of New Zealand (RBNZ) made its first interest rate decision and monetary policy, but it was not what the market participants expected. The Central Bank did not follow the same dovish theme seen by other central banks. The Official Cash Rate (OCR) was left at 1.75%, as widely expected, and the RBNZ expects to keep the OCR at this level through 2019 and 2020.

“The direction of our next OCR move could be up or down.”

Governor Adrian Orr has downplayed the odds of a rate cut but has not entirely removed it off the table. Given the global risks and uncertainties, the chance of a rate cut is not eliminated but has not increased either.

• NZDUSD jumped on the signals to hold on to rates though to 2020 while the AUDNZD dropped by almost the same extent. We saw movements above 100 pips following the Rate Statement.

• AUDUSD, which is highly correlated with the NZDUSD, added a few pips and built on gains from the uptick in the Westpac Consumer Confidence released before the RBNZ’s interest rate decision.

The RBNZ strikes a “data-dependent” approach and says that they are comfortable with the inflation target and mid-point pressures. The Governor stretched that “they need data from the financial markets around how they are pricing and seeing the risks as well.” When asked about the rise in unemployment, Orr mentioned that “the surveys are not reflecting what we hear about the business tables”, and that “employment is near its maximum sustainable level”. Overall, the big picture here is that the RBNZ appears more confident that other central banks on its outlook for the New Zealand economy. The Central Bank noted that the low-interest rates and expected government spending would eventually support a pick-up in Gross Domestic Product over 2019.

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