RBNZ Statement Likely To Be A Mixed Message

The New Zealand dollar is the one to watch this Wednesday coming, as the Reserve Bank of New Zealand (RBNZ) is set to announce its regular interest rate statement to the public. With the current interest rate sitting at 3.25%, it stands as one of the highest in the developed world, as well as one of the safest in terms of fixed interest rate investment – making NZ a great opportunity for carry trades globally.

While all the positive sentiment has so far lifted the NZD/USD cross and various other crosses between currencies, it has so far led to an economic headache for the economy of New Zealand, which relies heavily on its primary industry sector. With a high exchange rate the New Zealand economy has become vulnerable to any negative movements in commodity prices, and so far we have seen a downward movement in the commodity price index; especially in the milk and wood sector.

Many would see this as a reason to perhaps look at the slowing of interest rates rises in New Zealand, as the economy comes under pressure. But that is perhaps a very one sided view and there are a number of key factors which drive the Reserve Bank of New Zealand – mainly inflation and house prices in the present environment.

Inflation so far has been weaker than expected, which shows the interest rate rises are having an impact on slowing the economy and stopping it from ‘overheating’. However, housing is still a hard subject for the economy as a whole, and the housing market still continues to see gains, as house prices are still out of reach for many in the economy. Compounding this issue is that net migration has slowed heavily, in fact, we have seen a reverse and now immigration to New Zealand has increased; with 4270 people entering New Zealand making it the second-largest monthly gain on record, as many New Zealanders are returning from Australia as the economy weakens over there. This has put pressure on the housing market in New Zealand and it’s likely the RBNZ will take this into consideration – especially as there is at present a housing dearth in the market.

Many would like to see the New Zealand dollar fall further in the present environment, but the housing sector is going to constrain the RBNZ from slowing down interest rate rises. And while the primary industry is struggling at present it may not be a long term trend necessarily, if anything central banks prefer to get all the data and be reactionary rather than progressive with monetary policy. Graeme Wheeler has shown himself to be a prudent governor thus far and one that does not jump the gun and tries to be as transparent as possible. It’s likely he will comment on how high the New Zealand dollar has been as of late, but it’s certainly more likely he will talk about the need to control the housing market which may get out of hand if immigration trends continue.

Tomorrow will be interesting, expect an interest rate rise, but if you’re banking on a talk that there will be a slowing of those rises, you may get a mixed message which is inconclusive. The focus will likely be on the housing market and the effect immigration will have on the current housing shortage in the market. Remember also that Graeme Wheeler is very much reactionary and has a history of holding off for as long as possible before a change in policy.