ANZ comments on Reserve Bank of New Zealand Governor Wheeler's speech this morning.

ANZ quick off the market with their key points and analysis.

The upshot is, they say:

Whilst acknowledging some of the downside risks to the outlook, Wheeler's speech took a balanced view of the economic outlook, emphasising that while momentum has slowed the economy is not yet heading for recession.

The key message of the speech is that the RBNZ would like a lower NZD, but that future moves in the OCR will be contingent on both data and events.

This is consistent with our core OCR view of a 25bp September cut, with a March cut dependent on the inflation outlook.

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More:

  • RBNZ confirmed that there is still a reasonable hurdle for further OCR cuts, albeit that these are seen as "likely".
  • the large declines in interest rates currently predicted by "some local commentators" would only be consistent with the economy moving into recession
  • The tone of the speech suggests strongly that this is not the RBNZ's view at present

Several factors are supporting economic growth:

  • easing in monetary conditions (lower NZD and interest rates)
  • continued high levels of migration and labour force participation
  • ongoing growth in construction
  • continued strength in the services sector

This is not to say that the RBNZ do not acknowledge the challenges facing the economy

  • weaker terms of trade outlook
  • "Demand and output growth may be a little below trend"

Rate outlook

  • RBNZ keeping their options open
  • Future path of the OCR will be driven by the flow of incoming data, the assessment of the economic outlook, and the Bank's judgement as to what level of interest rates will achieve the Bank's price stability goal
  • September MPS ... a key event

Auckland housing market

  • RBNZ will not want to unnecessarily inflame the market

Low inflation backdrop was acknowledged

  • headline inflation will approach the target midpoint by the first half of 2016

RBNZ analysis suggests that the neutral 90-day rate currently sits in the 4 to 5 percent range

  • If core inflation is structurally low, the neutral OCR assessment and endpoint could be a tad too high

The RBNZ has continued to apply downward pressure on the NZD

  • "further exchange rate depreciation is necessary"
  • However, with positioning extreme and markets well cognisant of the factors driving NZD lower it seems a further period of consolidation for NZD is in order
  • Given the RBNZ see the economy growing at around 2.5% it is clear that short of further adverse surprises, the pace of further OCR adjustments will be measured. This de-emphasises the OCR as a short-term driver for NZD, and should see short positions reduced.