Summary:

• September’s meeting is the first one with Grant Spencer being an ’acting’ director
• NZD weakened since the latest meeting, a reference to the ex-change rate is worth looking at
• Remarks on inflation are among the most important to foresee a future move in rates
• General election’s outcome could have equivocal ramifications on the economy

The Reserve Bank of New Zealand is widely expected to leave its OCR at 1.75% , however the meeting will be the first with Grant Spencer being an acting director, hence at least subtle changes in rhetoric could occur. The probability of a hike today is close to zero, thus focus will be on the statement and some references to the ex-change rate and inflation as well. Let us also recall that September’s meeting will be not equipped with the in-dept monetary policy statement, so its relevance might be a little lower.

Let’s start with the NZD which weakened against the US dollar since the last meeting in August from ca. 0.7350 to the current level slightly below 0.72 at the time of writing. Even though it’s not a substantial move, it could spur the bank to subtly alter its reference in that area. Bear in mind the RBNZ put a phrase into last month’s statement that a lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth. If the bank decides to soften its tone, it could be NZD-supportive. On the other hand, there is a little evidence of self-sustaining inflation pressures, hence this factor could discourage the RBNZ from expressing even a slight hawkish stance.

Subdued wage growth dials back inflationary pressures which could limit space for ’hawkishness’ of the RBNZ. Source: Macrobond, XTB Research

Moreover, the NZ economy experiences vastly muffled wage growth which in real terms came in barely above zero in the second quarter. Having regard to restricted wage pressure, it’s hard to envisage sustained inflation which could force the RBNZ to hike rates. To sum up, until we see higher wages, a more noticeable pick-up in price dynamics induced by endogenous factors is unlikely. Notice, the central bank expects headline inflation will decline in coming quarters when effects stemming from higher fuel and food prices dissipate.

Furthermore, let us recall that the RBNZ has introduced macro-prudential measures aimed at cooling heightened house prices more than a year ago and these measures have already kicked in as house price inflation has continued slowing down. The bank underlined that fact in its statement in August adding that this moderation is projected to keep on barring risks related to imbalances between supply and demand in the economy. Putting all the above-mentioned together one could conclude that the RBNZ is decisively not in a rush to tighten policy any time soon. Markets share this view as well as the likelihood of a rate increase till mid-2018 hovers below 50%.

Markets see barely odds for a hike until mid-2018. Source: Bloomberg

The state of play in terms of political risks is quite ambiguous. The outcome of the general election was more or less in line with expectations, one thing is still a sticking point though – a coalition with New Zealand First. Let as recall that National Party easily beat its rivals achieving as much as 58 seats in the Parliament consiting of 120 seats, though it is short of a required majority to put together the government on its own. That said, one of the most probable scenario is the hung parliament with New Zealand First. The party stands for a reduction of immigration. On the one hand, it could reduce GDP growth, however on the other it could help boost wages which, in turn, could translate into higher inflation. Nevertheless, the jury is still out as a head of New Zealand First announced that coalition talks will begin when all votes are counted (the end of counting of overseas votes is anticipated on 7 October). By and large, politics could act not in favor of the NZ dollar at least in the short-term.

The NZDUSD could be poised to continue sliding mainly on the back of strength of the US dollar. Source: xStation5

Technically the pair seems to be poised to continue declining as lows as an ascending trend line. Before it could happen, the price needs to break a local support nearby 0.7100. Taking into account that the greenback will be appreciating in the short-term, it could bring about a move even towards 0.6850 where an important support zone is placed. On the flip side, a hawkish hint from the RBNZ (the least probable scenario) today could buoy the NZD, but an upward move is likely to fade anyway.