Dovish but inconsistent
Here is how Westpac sees the RBNZ decision:
"The RBNZ's Monetary Policy Statement (MPS) this morning kept the OCR on hold at 1.75%, as was widely expected, and retained a largely neutral bias. However the slightly dovish final policy sentence was surprisingly retained, while the OCR projection was shifted 10bp higher. Markets focused on the former, causing the NZD to fall slightly.
The key policy guidance paragraph stated: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
This is almost a cut and paste of the first and last sentences from the 10 November MPS which read: "Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that policy settings, including today's easing, will see growth strong enough to have inflation settle near the middle of the target range. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly." The retention of the final sentence surprised markets which had expected that glimmer of an easing bias to be removed.
The new OCR projection was a hawkish surprise, showing the OCR flatlining at 1.8% until Sep 2019 and then rising to 2.0%. The consensus was for a slight shift to 1.8%, so the slope at the far end of the projection may be read as the RBNZ's first acknowledgement the next move will be a hike (if the track is interpreted literally). This is not entirely consistent with the final policy sentence.
The NZD exchange rate narrative was a cut and paste of November's: "The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed."
The market read the
MPS as a slight dovish surprise. NZD/USD fell from 0.7300 to 0.7253. We would
expect the NZD to base in the low 0.7200s."