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RBNZ to keep rates on hold, retain easing bias

07 June 2016
When the Reserve Bank of New Zealand (RBNZ) surprised markets by cutting interest rates in March a further interest rate reduction was built into the interest rate projections. At that time we suggested it would be strength in the exchange rate that would be the catalyst for that to be delivered, while renewed strength in the housing market was the most likely factor that would lead to its demise. 
 
Indeed when the Bank cut in March, we thought they were being overly sanguine about the housing market. While that appears to confuse two objectives - the inflation target and financial stability - we thought the reward of higher inflation from a further interest rate reduction was dwarfed by the risk to financial stability of further inflating the housing market.
 
We expected the strength of the exchange rate would be enough to get them just over the line in cutting in April, which it clearly wasn’t. We also expected the longer the Bank waited, the less likely it would be that we would actually see that second cut.
 
So to June. The housing market is stronger, household credit growth is rising, petrol prices are higher, global financial markets are calmer and many of the risks to the global economy markets were fretting about earlier in the year have dissipated. That has enabled the US Federal Reserve to resurrect the likelihood of a summer rate increase which has seen some recovery in the USD and a weaker Kiwi dollar.
 
That said, the NZD/AUD is uncomfortably high though recent stronger data out of Australia suggests the RBA may not be in a rush to cut interest rates further.
 
On balance we think the RBNZ holds rates steady in June, but retains its bias to ease.  It continues to be the unwelcome strength in the exchange rate that may prove to be the catalyst for a rate cut further down the track.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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