RBNZ preview: shouldn’t ruffle markets much - Westpac

Analysts at Westpac explained that they expect the RBNZ to remain on hold at 1.75% at Thursday’s MPS, and to retain a neutral bias, which shouldn’t ruffle markets much.

Key Quotes:

"There’s a small risk of a hawkish shift. The RBNZ shifted to a more neutral stance in last November’s Monetary Policy Statement. While the cash rate was reduced to a new record low of 1.75%, the Statement noted that “policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range”. What’s more, the projected interest rate track was flat at its current level for the entire forecast horizon, the message being: the time to even contemplate rate hikes is a long way off. We expect a firmly on-hold statement on Thursday, in line with the November projections."

"Our central scenario is defined by a broadly unchanged policy stance, although the OCR track would round up to 1.8% for the three years ahead instead of remaining rounded down to 1.7%. This outcome, which we give an 70% probability, would represent only a modest shift in a hawkish direction and thus elicit only a modest response from markets (2yr yield up 3bp, NZD/USD up 0.25 cent). Our hawkish scenario (20% probability) sees the RBNZ shift its OCR track from 1.7% to 1.8%, adding positive slope at the distant end of the forecast horizon. This would be the first acknowledgement that tightening will be required at some juncture, and would give markets the green light to more aggressively price in rate hikes. The 2yr swap would rise by 10bp, NZD/USD by 1c. Our dovish scenario (only a 10% probability) sees the track remaining unchanged, with some language implying easing remains possible (e.g. due to rising funding costs). Markets would be skeptical, and would only push the 2yr swap 4bp lower and NZD/USD 0.5c lower."