The RBNZ considers its options

An RBNZ monetary policy meeting earlier today proved to be mostly a non-event for the market, with the kiwi only dropping slightly on the back of the bank’s decision leave the official cash rate at 2.5% and accompanying press conference by Governor Wheeler. The bank is weighing the threat of rising house prices against the negative implications of a higher currency. Wheeler has been very vocal about the detrimental impacts that the high value of the kiwi is having on the economy. At a speech at the end of May the governor stated that one of the main reasons the bank was keeping interest rates low was to avoid making the kiwi a more attractive investment. He reiterated this earlier today, stating that the recent decline in NZD isn’t enough to alleviate pressure on the NZ economy.

However, as the bank is painfully aware, rising house prices threaten to create an asset bubble. The RBNZ wants to avoid this at all costs for obvious reasons, hence, it needs to find a way to suppress an increase in house prices without increasing the attractiveness of the kiwi. This rules out raising interest rates in the near-term as this would likely result in increased flows into the kiwi. Another option which the bank is considering is using macro-prudential tools, specifically ones aimed at regulating banks’ capital ratios and limiting some types of mortgages. In fact, this is exactly what we expect the bank will do. However, it may only be a short-term solution if the broader economy starts to gain pace.

Overall, we think the bank will need to raise interest rates eventually to tackle rising house prices. This will likely be early next year, assuming the global economy doesn’t take another turn for the worst, which should help support the kiwi, although possible USD strength later this year on the back of a possible tapering of the Fed’s QE3 cannot be ignored. Thus, we favour the kiwi against currencies which we think may have more downside potential.

Источник: Forex.com

12.06.2013