Published: Sat, February 15, 2020
Markets | By Otis Pena

RBNZ Sets Bullish Tone; Drops Chance of Rate Cut This Year

RBNZ Sets Bullish Tone; Drops Chance of Rate Cut This Year

The RBNZ said in its statement that economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade.

At its first meeting of the year, the RBNZ flagged new risks to the economy from the coronavirus epidemic in China but expected any impact to be limited.

The two-year swap rate climbed to a bid price of 1.1600 per cent from 1.1550 yesterday while 10-year swaps rose to 1.5300 per cent from 1.5050.

The RBNZ assumes the economy will grow faster than its potential growth rate from mid-2020 but doesn't project a sharp rise in prices.

"Our confidence is we are seeing monetary policy is working", Reserve Bank of NZ (RBNZ) Governor Adrian Orr told lawmakers on the Finance and Expenditure Committee, saying planned capital spending by the government was supportive.

The Official Cash Rate was kept steady at 1.0 percent, as expected. The government has also announced a NZ$12 billion ($7.7 billion) infrastructure investment plan that may start to boost growth later this year.

Ha said some of the forces supporting growth are the fact that monetary policy stimulus has kicked in after the RBNZ cut the official cash rate by 75 basis points a year ago to 1 per cent, house prices are lifting, and asset prices are lifting. Slower global growth over 2019 acted as a headwind to domestic growth.

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The New Zealand dollar jumped as much as 1.1% after the announcement as some traders expected the bank to leave the door open to further easing.

Orr said the RBNZ considered an "insurance cut" to the OCR, "but didn't see the need".

"The OCR forecast will probably continue to show a terminal rate of 0.9% which effectively signals a rate cut as a 50/50 likelihood". Indeed, it forecasts one hike by late 2021. The recent statement, therefore, served to remove the prospect of a rate cut in the upcoming months.

Above: Pound-to-New-Zealand Dollar rate shown at weekly intervals.

Both ANZ's Zollner and MUFG's Hardman have warned the RBNZ might be too optimistic in its outlook for the Kiwi and global economies in light of the damage that looks to have been done in China by the coronavirus that's spreading there. "We have very low stimulatory interest rates", he added. The growth rate for infections and deaths is now falling but the Chinese economy remains largely at a standstill and the outbreak is far from over.

Looking at longer horizons, the reluctance signalled by the RBNZ around easing prospects likely puts a floor under New Zealand rates for the foreseeable future.

"There is a risk that the impact will be larger and more persistent".

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