RBNZ

RBNZ

The RBNZ is due to meet tomorrow and their last known trajectory was for negative interest rates for 2021. What else can we expect from the RBNZ and what does that mean for the NZD.

New tool Funding for Lending Programme (FLP)

Governor Orr should release details of the new FLP tomorrow. The programme is designed to provide cheap loans to banks so they can further reduce lending rates. There are some economists who see this being focused on business lending so that it boosts economic activity rather than house prices.This tool is seen as a pre-cursor to negative interest rates. The thinking is that if the RBNZ do decide to take the official cash rate negative next year the FLP rate would also fall with it so the banks can directly pass the cut on to customers. THE FLP is to make the NIR impact effective.

Are rates still set to go negative?

The consensus amongst New Zealand economists is that the RBNZ is to cut -0.50% in 2021. However, several economists think the bank will hold back from rate projections tomorrow in order to avoid being pinned down.The RBNZ shadow board which is put together by the New Zealand Institute of Economic Research sees less need for further stimulus. The need to go negative was seen as now reduced. See here for more info from Eamonn. My take on it is that things are looking better for New Zealand and negative rates may be unnecessary. However, we will find out what the RBNZ think tomorrow and they most likely stay out for now.

What's the possible trade?

Well last week the RBA kept rates on hold and said that the current 0.10% level was pretty much the bottom rates will go in Australia. So, if a divergence opens up and the RBNZ still looks like heading negative then a AUDNZD buy makes sense.

However, if the RBNZ are more optimistic and walk back from negative rates, then that changes the AUDNZD outlook to neutral.This would potentially open up a NZDUSD buy on pullbacks as the NZD dollar should boost higher on an optimistic RBNZ against a weakened dollar post Biden victory. That is, of course, unless strong USD buying enters in.