The two central banks that drive our currency around stood firm today, leaving their official cash rates on hold. In response, the New Zealand dollar rose yet again after a monetary policy decision to over 73.5 USc, further squeezing the Reserve Bank towards another Official Cash Rate cut on November 10.
The US Federal Reserve set the agenda earlier this morning by choosing to hold its Fed Funds rate at 0.5%, but only after an intense debate about whether to hike for the second time since last December that saw three voting members formally disagree with the decision. Most now expect the Fed to hike in December.
However, the Fed's "dot plot" of expected future interest rate increases was down by around 50 basis points from its last iteration, which saw the US dollar weaken against other currencies, including the New Zealand dollar. The Kiwi rose around 40 basis points to 73.2 USc through the evening and by a further 20 basis points after the Fed decision.
Then at 9 am this morning our Reserve Bank held the Official Cash Rate at 2.0%, but repeated its view that "further policy easing will be required" and that a "decline in the exchange rate" is needed. That didn't happen immediately after the statement. The Kiwi rose another 10-20 basis points to just over 73.5 USc in the first half hour of trade after the decision.
Next NZ rate cut seen on November 10
The decision to hold the OCR and signal further monetary policy easing was expected by all economists, with the only doubt over whether there will be one or two more OCR cuts, with the first one expected with the Reserve Bank's next full Monetary Policy Statement on November 10.
The Reserve Bank's decision was an 'in-between' one wedged between full Monetary Policy Statements and therefore did not include a Reserve Bank forecast track for the 90 day bill rate, which is seen as a proxy for the OCR. The Reserve Bank's August 11 MPS included a forecast implying one or two more cuts in the OCR to around 1.65%, and that view was reaffirmed in a speech written by Graeme Wheeler and delivered on August 23 by John McDermott.
Wheeler began the statement by pointing to below-trend global growth despite unprecedented monetary stimulus.
"Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation," Wheeler said, pointing to volatility in global markets in recent weeks and an uncertain outlook for global growth and commodity prices, along with political uncertainty.
"Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate," Wheeler said.
"The trade-weighted exchange rate is higher than assumed in the August Statement. Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," he said.
'High migration limiting wage pressures'
Wheeler said June quarter GDP figures were consistent with the bank's expectations and local growth was being supported by strong net immigration, construction activity, tourism, and accommodative monetary policy.
"While dairy prices have firmed since early August, the outlook for the full season remains very uncertain. High net immigration is supporting strong growth in labour supply and limiting wage pressure," he said.
'Moderating influence on housing'
Wheeler said house price inflation remained excessive and was posing concerns for financial stability.
"There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence," he added.
'Inflation to rise from below target'
Wheeler said headline inflation was being held below the bank's 1-3% target band by continuing deflation in tradables inflation, which is related to prices set on international markets. Annual CPI inflation in the June quarter was 0.4%.
"Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies," he said.
"Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation. Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations."
Wheeler said monetary policy would continue to be accommodative.
"Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data," he said.
In other economic and financial news...
Fonterra yesterday lifted its forecast payout for 2016/17 by 50c/kg to NZ$5.25/kg, which is just above the break-even level for most farmers. Fonterra also today published its 2015/16 result, including a 65% rise in net profit and plans for a 40c/share dividend to add to the NZ$3.90/kg payout for 2014/15 for farmers who are shareholders.
Statistics NZ yesterday reported net migration was stable around 5,600 in August and at a record-high 69,100 for the year to August, which was slightly stronger than economists expected. The figures showed net migration has at least plateaued at these high levels, but is not falling as Treasury and many expected. The big factor stopping yet more rises to record highs is a significant drop in Indian student numbers after a crackdown on visa fraud and tougher English language rules. There were 298 student visas issued to Indian residents in the month of August, down 66.4% from the same month a year ago, while Indian student visas were down 22.7% to 8,167 in the year to August.
In more deflationary news, Nathan Guy announced ACC had proposed further levy reductions for workers and motor vehicles, and a slight increase in the earners' levy. "Overall, the proposed levies would see New Zealanders paying around NZ$76 million less in ACC levies if implemented, and this would come on top of NZ$2 billion of levy cuts since 2011/12," Guy said.
Twitpic of the day:
Luke Appleby with WinstonPeters.exe not working again after Peters did not appear for his initial question in Question Time.
Oh man, not again
Have a great day.