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Traders split on RBNZ's April rate cut decision as kiwi flies high

Friday 22nd April 2016

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Traders are evenly split on whether Reserve Bank governor Graeme Wheeler will deliver another interest rate cut next week, with the kiwi dollar flying above the central bank's projections, making imported products cheaper and keeping a lid on inflation. 

Financial markets are judging a 54 percent chance of the official cash rate staying at 2.25 percent at next Thursday's review, according to the overnight index swap curve. Economists are leaning towards a cut coming in June when RBNZ governor Graeme Wheeler could explain the bank's outlook more fully in a monetary policy statement, rather than next week's one-page release. 

Wheeler surprised the market last month when he cut the benchmark rate to a new record low. While recent inflation figures were in line with the central bank's projections for an annual increase of 0.4 percent in the year to March 2016, the kiwi dollar has remained strong as international central banks continue to print money and run extraordinarily low interest rate policies. 

"While the March surprise highlights the potential for another (OCR cut), the RBNZ has expressed a preference for moving on MPS as opposed to review dates in the absence of material shifts in information," ANZ Bank New Zealand chief economist Cameron Bagrie and economist Phil Borkin said in a note. "With regards to the currency, it’s hard to see how a further rate cut could substantially influence the direction of the NZD (December and March cuts certainly didn’t) amidst actions of other central banks."

A simple moving average of New Zealand's trade-weighted index forecasts the measure at 75.86 in the June quarter, above the central bank's projected average of 70.9 in the period, and a touch lower than the 75.94 average in the March quarter, when the central bank was predicting an average of 72.3. The TWI was recently at 72.78. 

Westpac Banking Corp's New Zealand chief economist Dominick Stephens said the only reason the Reserve Bank would choose to lower rates next week was if it had already decided that the OCR needed to go below 2 percent, while ASB Bank chief economist Nick Tuffley said it was finely balanced and would come down to whether Wheeler was more concerned about re-emerging price pressures in Auckland's housing market or the persistent strength of the kiwi dollar. 

Kiwibank economist Zoe Wallis, the only local forecaster to pick the March cut, predicts another reduction next week, citing the strength of the kiwi dollar, soggy business confidence, a deteriorating trade outlook and elevated bank funding spreads. 

"We expect the bank to opt for more stimulus sooner rather than later and deliver a 25bps cut at next week’s April OCR review," Wallis said in a note. " If the RBNZ delivers a statement in line with our expectations, then we are likely to see short-dated swap rates fall between 10-20bps on the day and the currency also to decline sharply."

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