New Zealand rate-cut bets rise on unexpected RBNZ economy update

by NZ Adviser15 Jul 2016
(Bloomberg) -- New Zealand’s central bank said it will issue an unscheduled assessment of the economy next week, prompting traders to increase bets on an interest-rate cut in August.

The assessment, which will be published on July 21 and won’t include a review of the official cash rate, is being made because of a longer-than-usual period between policy decisions, the Reserve Bank said in an advisory in Wellington Thursday. The odds of a quarter-point cut at the next OCR review on Aug. 11 rose to more than 60 percent from 40 percent, and the New Zealand dollar fell more than half a U.S. cent.

Doubts about an August rate reduction grew after Deputy Governor Grant Spencer last week said the central bank needed to carefully consider risks to financial stability when deciding the path of monetary policy. The swing in sentiment helped drive up the kiwi dollar, which may suppress import prices further and make it harder for the RBNZ to attain its inflation target.

“The economic update proves one opportunity to communicate displeasure with the exchange rate,” Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland, said in an e-mailed note. “The RBNZ would like to see the New Zealand dollar weaker.”

Kiwi drops
The currency fell 0.8 percent to 72.15 U.S. cents at 5:20 p.m. in Wellington. The trade-weighted currency index fell to 77.05 from a 14-month high of 77.24 earlier this week. The RBNZ in June assumed the index would average 71.6 in the third quarter.

The RBNZ said it decided to publish the economic assessment because of an 11-week gap between the June 9 monetary policy statement and the next rate decision. This year it has dropped a July review as it readjusts its release schedule. The central bank declined to comment further on its advisory notice.

“We doubt the update would be occurring if the economic and inflation outlook had not changed markedly since the June MPS,” said Gibbs. If the currency was to sustain current levels, the RBNZ “would be forced to significantly mark down its inflation forecast –- and to some extent its GDP growth forecast –- in the August MPS,” he said.

Governor Graeme Wheeler left the official cash rate at a record-low 2.25 percent in June but said further reductions may be required. The central bank forecast then that annual inflation would accelerate to 2 percent by late 2017. It estimated prices rose 0.6 percent in the year through June -- that data is due July 18.

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