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29 Oct 2014
RBNZ: Tightening cycle to become conditional - Westpac
FXStreet (Bali) - Imre Speizer, FX Strategist at Westpac, notes that in tomorrow's RBNZ meeting, the OCR is expected to remain unchanged at 3.50%, the pause duration to extend, and the resumption of the tightening cycle to become conditional.
Key Quotes
"The main development since the RBNZ’s September MPS is the surprisingly low Q3 CPI outturn. At 1.0% yoy it was 0.3% lower than the RBNZ had forecast. The other notable negative developments have been the further declines in export commodity prices and the slightly slower pace of GDP growth, although these are offset by the lower exchange rate and higher migration."
"The net impact of all these developments is likely to be a longer pause duration compared to that implied in the September MPS. The resumption of the tightening cycle is now likely to be not until September 2015, rather than Q2 2015, and will be indicated by language such as: "The current period of monitoring and assessment is likely to continue for some time."
"In addition, the unconditional tightening signal is likely to have some conditionality attached: "While we expect some further policy tightening will be necessary, the timing and extent will depend on how inflation responds to economic and financial developments."
"The above characterisation of the narrative (note there are no forecasts published from this meeting) represents our central scenario to which we assign a 70% probability. The market has probably priced this in already, being 40bp below the RBNZ’s most recent projections at the Dec-16 point . The 2yr swap rate should thus not move much in response. The NZD/USD exchange rate, though, is vulnerable to a modest decline."
"Our dovish scenario, to which we assign a 20% probability, is defined by a removal of any hint of further tightening. The 2yr swap should fall by 10bp in response."
Our hawkish scenario, to which we assign a 10% probability, is defined by a retention of September’s policy paragraph. The 2yr swap should only rise by around 6bp in response, partly because the market would view such a statement with skepticism.
OIS pricing currently implies around zero chance of a hike during the next six months, with the next hike priced for not until December 2015..
Key Quotes
"The main development since the RBNZ’s September MPS is the surprisingly low Q3 CPI outturn. At 1.0% yoy it was 0.3% lower than the RBNZ had forecast. The other notable negative developments have been the further declines in export commodity prices and the slightly slower pace of GDP growth, although these are offset by the lower exchange rate and higher migration."
"The net impact of all these developments is likely to be a longer pause duration compared to that implied in the September MPS. The resumption of the tightening cycle is now likely to be not until September 2015, rather than Q2 2015, and will be indicated by language such as: "The current period of monitoring and assessment is likely to continue for some time."
"In addition, the unconditional tightening signal is likely to have some conditionality attached: "While we expect some further policy tightening will be necessary, the timing and extent will depend on how inflation responds to economic and financial developments."
"The above characterisation of the narrative (note there are no forecasts published from this meeting) represents our central scenario to which we assign a 70% probability. The market has probably priced this in already, being 40bp below the RBNZ’s most recent projections at the Dec-16 point . The 2yr swap rate should thus not move much in response. The NZD/USD exchange rate, though, is vulnerable to a modest decline."
"Our dovish scenario, to which we assign a 20% probability, is defined by a removal of any hint of further tightening. The 2yr swap should fall by 10bp in response."
Our hawkish scenario, to which we assign a 10% probability, is defined by a retention of September’s policy paragraph. The 2yr swap should only rise by around 6bp in response, partly because the market would view such a statement with skepticism.
OIS pricing currently implies around zero chance of a hike during the next six months, with the next hike priced for not until December 2015..