RBNZ having second thoughts

Going into the April decision, markets had placed around a 50% chance of another 25 basis point cut at that meeting. This was driven by the culmination of a number of factors.  Back at the March MPS, the Bank had indicated that “further easing may be required” and had included another 25 basis points of cuts by the middle of the year in their 90 day bank bill rate projections.  Subsequent to the March MPS, the economic data had been mixed: the stronger TWI pointing to more cuts needed sooner; with the main offset being the stronger March housing market data.

Not only did the RBNZ leave the OCR unchanged at the April Review, but the accompanying statement seemed to have much less conviction about the outlook for the OCR heading lower.  The RBNZ stuck with their phrase that “further easing may be required”; whereas the market had been expecting a more definite statement that “further easing seems likely”, which usually sets up a move at the next meeting.  When added to the three references in the statement to global and domestic policy already being accommodative, it hinted at the RBNZ being hesitant to add more stimulus unless really required.

However, the most noticeable revision in the press release from March was the treatment of the housing market.  This changed 180 degrees, moving from “house price inflation has moderated” in the March statement to a reference that “there are some indications that house price inflation in Auckland may be picking up” in the April statement. 

While factually correct, by singling out Auckland and changing their view in one month, the RBNZ risks feeding the market perception that they are hyper-sensitive about the housing market, almost at the expense of their primary objective of targeting future CPI inflation. (A more neutral approach would have been to note that housing market data has been volatile in recent months, and reserve judgment until there is a clearer signal available.)