MNI STATE OF PLAY: Recovery To Stall RBNZ Negative Rates Push

The Reserve Bank of New Zealand will likely look past the strength of the currency and push back on thoughts of negative interest rates, leaving its monetary policy settings unchanged when policymakers meet Wednesday.

With the economy picking up and house prices surging, the RBNZ looks certain to keep the official cash rate (OCR) on hold at the record low of 0.25%, while continuing with the NZD100 billion program of quantitative easing announced last year.

Despite calls from former RBNZ officials for monetary tightening to dampen the housing market, any tightening in policy measures remains improbable with the current accommodative outlook likely to stay in place for most of 2021. Many market analysts see interest rates remaining unchanged until 2024, although there are expectations that the central bank will start to taper its bond buying later this year, as a former RBNZ chief economist told MNI earlier this month.

KIWI STRENGTH

In making its decision, the RBNZ will be mindful of the strength of the New Zealand dollar, which has strengthened from US56 cents in March 2020 to around US72 cents now. Any signs that the bank is stepping back from its ultra-easy policy will put the bank out of step with global peers and could put further upward pressure on the kiwi.

The RBNZ cut the OCR by 75 basis points last March and said it would keep it at 0.25% for 12 months. It hinted on many occasions that rates could be cut into negative territory if needed, and financial institutions were told to prepare their operations for such a possibility.

Economic indicators and business and consumer confidence are all positive, while the most significant factor in the domestic economy is house prices, which gained 19.3% year-on-year to February.

An update on the outlook will come in the quarterly Monetary Policy Statement also due on Wednesday.

MACRO-PRUDENTIAL MOVES

Earlier this month, in a bid to cool the country's surging property market, the RBNZ reimposed the loan to value ratios which determine the deposit home buyers have to come up with to take out a mortgage.

RBNZ deputy governor Geoff Bascand said there was "evidence of a speculative dynamic emerging with many buyers becoming highly leveraged." The central bank dropped LVRs last year at the height of the pandemic disruptions.