By David Hargreaves
The Reserve Bank is to give an unscheduled "update on its economic assessment" next week in a surprising move that suggests it is planning to cut interest rates at its next Official Cash Rate Review on August 11.
The markets have not been expecting a cut to the OCR, which stands at 2.25%.
Partly based on this expectation, plus the uncertainty stemming from Britain's Brexit vote and other international developments, the Kiwi dollar has been soaring to levels far above those forecast or desired by the RBNZ.
Now it would appear highly likely that the RBNZ does in fact intend to cut the OCR on August 11. Next week's statement - signposted by the RBNZ in a brief advisory note put out this afternoon - may well be to prepare the market for such an outcome.
As the marketplace began to digest news of the RBNZ's surprise move, the dollar started to lose impetus and a short time ago was just above US72c, down from US72.8 before the RBNZ advisory note came out.
One reason cited by those in the market for expecting that the RBNZ would not drop rates next month has been the incendiary state of the housing market and fear that a further rate drop would pour more petrol on it.
More macro measures coming
However, the RBNZ did last week give broad indications of plans for more macro-prudential measures to be introduced. These include a single loan-to-value ratio lending restriction for investors to be introduced by the end of the year and some kind of 'speed limit' on debt-to-income ratios, probably next year.
The RBNZ's wording of next week's announcement as an "economic assessment" would appear to be sufficiently broad to allow the central bank to move outside of its 'monetary policy' area (inflation targeting) and talk about the housing market, which is generally a 'financial stability' issue.
It's possible the RBNZ will use next week's statement to reinforce the fact that new macro-prudential measures are very definitely coming. This could be done presumably with the hope that such comments would balance the potentially inflammatory impact of another rate cut.
Deutsche Bank NZ chief economist Darren Gibbs said if the Kiwi dollar were to remain at "anything like" current levels over coming weeks, the RBNZ would be forced to significantly mark down its inflation forecast – and to some extent its GDP growth forecast – in the 11 August MPS.
"That being the case, we think it would be hard for the RBNZ not to deliver the further OCR cut it first signaled in the March MPS. And for the sake of consistency, the RBNZ would likely be compelled to signal additional easing beyond that, notwithstanding real economy indicators that presently suggest that no further easing is required at this stage (including today's job ads, PMI and consumer confidence readings)."
'Displeasure with the exchange rate'
Gibbs said the economic update on 21 July provides an opportunity to "communicate displeasure with the exchange rate in particular".
"We think it is more than likely that the exchange rate will be described as unjustified and unsustainable, and a significant drag on the inflation outlook. Certainly we think that the RBNZ would like to see the NZ dollar weaker before it sets the exchange rate assumption that will underpin the revised inflation forecast in the August MPS."
In its brief advisory today announcing next week's update at 9am on Thursday July 21, the RBNZ said the update was being issued "given the longer-than-usual gap between Monetary Policy Statements (MPSs) as the Reserve Bank moves to its new release timetable this month".
"This [update] will not include an Official Cash Rate (OCR) review decision. The next OCR review will occur with the 11 August MPS," the RBNZ said.
The markets will inevitably take this most unusual move by the RBNZ as a clear sign that it does want to cut rates at that August 11 review.
The RBNZ made its last call on interest rates when it issued a Monetary Policy Statement on June 9.
Because the central bank is moving to a new timetable for OCR releases, the next review on August 11 will also include a Monetary Policy Statement. However, the time between the OCR reviews is much longer than the normal period of around six weeks.
Given that much has happened globally since June 9 - particularly following Britain's market-unsettling vote on June 23 in favour of leaving the European Union - the RBNZ presumably felt it couldn't wait any longer to signal its intentions to the market. This is particularly so as the market has not been pricing in the possibility of a rate cut.
The uncertainty in global markets in the wake of the Brexit vote, plus acknowledgement of New Zealand's relatively stable economy and relatively high interest rates has seen the Kiwi dollar given somewhat 'safe haven' status and it has continued to climb.
As of earlier today the NZ dollar was some 8.5% higher on a trade weighted index-basis than the RBNZ was forecasting for the September quarter.
A high dollar, as well as causing problems for exporters - including the struggling dairy industry - helps to act as a depressant on inflation. And the inflation rate has now been below the RBNZ's 1%-3% targeted range for nearly two years.
New inflation figures are due out on Monday, but these are expected to show annual inflation running at only about 0.5%.