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MNI RBNZ Preview - August 2020: RBNZ To Outline Policy Menu, May Scale Up LSAP
MNI Point of View:
- The Reserve Bank of New Zealand (RBNZ) will most likely leave the OCR unchanged at 0.25%, but could lift the cap on its LSAP programme to arrest NZD appreciation and reinforce market confidence. Despite positive signals sent by the economic data, the case for continuing to support New Zealand's economic recovery remains strong. The RBNZ will also unveil more details on its unconventional policy options and will likely reiterate readiness to use those tools if needed.
- All in all, the outlook remains skewed to the downside, as the coronavirus pandemic is set to weigh on global economic conditions for the foreseeable future. Admittedly, New Zealand remains a poster child of global efforts to contain the spread of Covid-19 and has just marked 100 days without any community transmission of the pathogen. An early exit from a strict, nationwide lockdown and sizeable fiscal stimulus helped give the ailing economy some relief. But with no clear end to the pandemic in sight and the looming reduction of fiscal support measures, the road ahead is a bumpy one.
- New Zealand's relative success in fighting the coronavirus outbreak and its economic fallout has been reflected in domestic economic data, which has generally topped expectations, including the projections from the May MPS. With the benefit of hindsight, the RBNZ's forecasts may have been overly pessimistic, which should warrant an upgrade to economic projections this time. That being said, things have not been rosy all along on the data front, as sentiment gauges deteriorated, while an (somewhat superficially) upbeat labour market report clouded some less optimistic details.
- On the currency front, the NZD has appreciated in reaction to global monetary and fiscal efforts to stimulate economic recovery, albeit its rally has stalled over the past few weeks. Still, it sits comfortably above RBNZ projections from their May MPS in TWI terms.
- With the OCR at the RBNZ's self-imposed effective lower bound and banks still operationally unprepared for negative interest rates, a reduction to the main policy rate at this meeting seems exceedingly unlikely. The RBNZ's primary tool of choice is its LSAP programme. Should the MPC judge that the time has come to touch policy levers, it will likely ramp up the size of the programme, but the case for doing so is not overwhelming.
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