RBNZ Preview - February 2021: Treading a Tightrope

MNI Point of View:

• This week's Monetary Policy Statement comes after a lengthy hiatus and RBNZ policymakers have a lot to digest. The three months since the last meeting witnessed a run of strong data signals, which resulted in money markets pricing out any further OCR reductions through the year-end and prompted a number of sell-side desks to ditch their earlier easing bets. Last year's speculation about potential for negative interest rates has become a fading memory and Governor Orr faces a fresh challenge – how to tip hat to solid economic data while maintaining a credible dovish bias.
• All in all, it seems like the RBNZ will have to acknowledge that New Zealand is on a path to recovery and the stimulus delivered to date via rate cuts, the LSAP scheme and the new Funding-for-Lending Programme is working its way through the economy. Just as most sell-side analysts, we expect that the upcoming MPS will see upward revisions to macroeconomic forecasts. However, while the RBNZ can afford to backpedal on its dovish stance, there are important reasons why it has tread carefully.
• With regards to the tools already in play, the current forward guidance will soon be outdated, as the MPC promised to keep the OCR unchanged through March, while the next Monetary Policy Revision is scheduled for April. It goes without saying that any suggestions regarding the trajectory of the benchmark policy rate will be of interest. On the LSAP front, the RBNZ appears to be already tapering purchases conducted under the programme without saying anything – it is unclear whether reductions in the pace of bond-buying have been a strategic policy move or just a technical adjustment. The NZ$100bn cap will likely be left in place – after all, it is just the upper limit and not a target – but policymakers could tweak the duration of the programme to spread out bond purchases.
• The main focus, however, will fall on rhetoric. The MPC will need to strike the right balance between admitting that the situation is better than it was and avoiding any premature hawkish overtones. With the OCR and the size of the LSAP programme poised to remain unchanged, markets await clarity on further trajectory of the main policy rate and LSAP dynamics. It would come as no surprise, if the RBNZ reiterated its readiness to act, despite encouraging economic data and the improvement in outlook.

MNI RBNZ Preview February 2021.pdf