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MNI PREVIEW: RBNZ Eyes Bond Buys To Address Currency Strength

No Rate Cut Expected, But Asset Purchases Could Be Increased

SYDNEY (MNI)

The Reserve Bank of New Zealand is seen edging towards further easing at the August policy meeting, as policymakers look to address a surging currency that is making life hard for the country's exporters already struggling in the pandemic-hit global economy.

With interest rates currently at a record low 0.25% and bank officials asking financial institutions to be ready for potential negative rates by the end of the year if there is a need, any easing will likely come in the form of further asset purchases -- although as former RBNZ chief economist John McDermott told MNI last week, there is the potential for up to 20bps in rates cuts to 0.05%

Despite the potential for a modest trimming of rates, an extension of the RBNZ's current bond-buying scheme, the Large Scale Asset Purchase Program, is the most likely move, with many pointing to a potential increase from the current NZD60 billion to as much as NZD90 billion.

FOREIGN BONDS

At the RBNZ's current rate of purchase, the LSAP is expected to run through until the spring of 2021, so there is no immediate need for an increase in bond buys.

That could give the RBNZ the opportunity to turn its bond buying focus towards foreign bonds, helping it directly address the issue of the stronger currency.

The Kiwi dollar has surged from USD56 cents in March to USD67 cents in recent days, an unwelcome rise which impacts NZ exports and economic competitiveness, as noted by the RBNZ at their last meeting.

OUTLOOK

The latest inflation forecast data was expected to provide some indication of potential RBNZ action, but the result was equivocal in terms of suggesting policy moves.

The two-year inflation forecast rose from 1.24% to 1.43%, edging closer to the midway point in the RBNZ target of between 1% and 3%.

Second quarter unemployment figures had the jobless rate at 4%, although this was an average over a three-month period, with the monthly indications unsurprisingly suggesting a higher unemployment rate in June, closer to 5%. The Government's NZ$13 billion wage subsidy scheme ends this month which is expected to put many more people out of work.

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