RBNZ 11 November Rate Decision
Photo by Wolf Zimmermann on Unsplash
The RBNZ delivered little in way of surprises in terms of the meeting itself. The asset purchase programme was maintained at $NZD100 billion and the new Funding for Lending Programme was launched. The Bank projected that the Official Cash Rate would remain at 0.25% until March of next year. All as it should be and no change, right? Wrong.
Better times ahead?
Digging into the detail we see better revisions for inflation. It is expected to rise to 0.9% in Dec 2021 vs previous forecast of 0.3%. Employment was projected to still weaken further in the near term, but then pick up. Most committee members agreed that the risks to their baseline scenarios were less skewed to the downside than they had appeared earlier in the year. This is hardly surprising with the positive vaccine news this week that the RBNZ is feeling more upbeat.
This rate meeting had a specific purpose
However, it is not just the more optimistic outlook that caused the market to buy NZD. It is also the fact that the last RBNZ meeting was really designed to launch the Funding for Lending Programme. The whole idea of this programmes is that if rates go negative banks can easily pass that savings onto customers. Here is an extract from the RBNZ's statement:
Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely. Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the Committee's principles for alternative monetary policy instruments
So, the RBNZ needed to keep up some sense of why this is a necessary move at the meeting. In theory they can still cut rates to negative and kept the option open. However, the message given by Governor Orr speaks loudly in that the rate is to remain at 0.25% until March 2021. There were no earlier calls for negative interest rates before then. The investment banks ANZ reduced their calls and see a cut to 0.10% in May and -0.25% in Aug 2021. ASN no longer expects negative interest rates and that seems the most likely route now.
Any trade ideas from this?
Therefore, with this shift in policy, a swing trade EURNZD short could be excellent as the ECB prepare a new wave of support for a COVID-19 impacted continent.
