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RBNZ meeting – a reminder to markets that it remains dovish

-->RBNZ meeting – a reminder to markets that it remains dovish            
  • NZD: RBNZ leaves all policy levers unchanged in the April MPR yesterday (OCR at 0.25%, maintains its LSAP (asset purchase) program of NZ$100bn by June 2022 and keeps existing conditions of its FLP (lending to banks) unchanged). The policy statement still maintains a dovish tone by saying that “the Committee agrees that medium-term inflation and employment would likely remain below its remit targets in the absence of prolonged monetary stimulus” though the statement also repeats that “risks to the economic outlook are balanced”.  The Committee also continues to emphasize that “it would not remove monetary stimulus until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives” which means the trigger is still a few years away. Furthermore, the policy statement presents the dovish rider that “the outlook remains highly uncertain” while acknowledging economic activity in New Zealand has slowed over the summer months.                   

  • NZD: Citi analysts therefore keep to their long-held view of no change to the RBNZ cash rate (OCR) until Q1 2023. This is also in line with market pricing. The team believes the Bank is more fearful of a weakening in the pace of recovery rather than a stronger activity profile and will likely retain the policy stance in a position to guard against unwanted lower output and inflation. To indicate potential bias, the RBNZ says  that the “Committee agrees that it is prepared to lower the OCR if required”. Regarding the LSAPs that have been reduced recently, the Bank confirms that that weekly changes in bond purchases do not represent a change in monetary policy stance.

  • NZD: On Remit modification in March, RBNZ committee emphasizes that the objectives of monetary policy in the new remit remain unchanged to include price stability and full employment. This serves as a reminder that house prices won’t be part of the monetary policy remit but will form part of its financial stability mandate. RBNZ however does recognize stimulatory monetary policy is playing a role in lifting house prices.

  • NZD: On the currency, there is no specific reference to NZD, following the February statement noting that international prices for New Zealand’s exports also supported export incomes, although the NZD exchange rate offsets some of this support. This is probably due to the current elevated milk and dairy product prices and improvement in NZ’s terms of trade (ToT) that has likely relaxed RBNZ’s view on NZD appreciation.    

 

Singapore’s MAS - accommodation “appropriate” on slower Q1 GDP 

  • SGD: Singapore’s MAS stands pat as Q1’21 GDP slows sequentially to +2% QoQ SA, +0.2% YoY (4Q:-2.4% YoY, 3.8% QoQ SA) — the policy decision meets consensus and Citi’s expectations. 2021 Singapore GDP is seen above 6% (Citi: 7%, revised from 5.7%), but with the output gap still negative in 2021. But while MTI is likely to upgrade official GDP forecasts to 6-8% in May, MAS still stresses “significant uncertainties” remain.  Meanwhile, 2021 average core CPI forecasts remain unchanged at 0-1%. Dovish guidance but with room for maneuver — notwithstanding some upside risks on global price pressures, Singapore’s core CPI is seen rising more gradually in 2H21 after the Q2’21 step-up. And with core CPI still below historical averages in 2021, MAS reaffirms its October 2020 assessment that “accommodative policy remains appropriate” though dropping the “sometime” characterization that introduces ambiguity about the duration of accommodation.  
  • SGD: Citi analysts base case is for MAS to stand pat in October (70% odds) if current 2021 core CPI forecasts are met, with the NEER (nominal effective exchange rate) possibly appreciating at the same pace as core CPI. The team sees normalization in April 2022, upon clarity that the 2% GST hike lifts 2022 core CPI to 1.5 - 2% with an upward re-centering possible in 2022. As a result, CitiFX analysts expect near-term SGD NEER range to be 100-150 pips stronger than the mid band and to gradually rise to the stronger end of the band towards end 2021/ early 2022. 

 

Is the ECB moving towards tolerating inflation overshoots?  

  • EUR: Powerful ECB Council member and Bank of France Governor Villeroy in comments overnight says the euro area’s inflation objective must be understood as a medium-term target rather than a ceiling and inflation could be tolerated above 2% "for some time" –he argues that “rather than flexible average inflation targeting, which leaves many questions unanswered, my preferred option would be the use of a strengthened and non-linear forward guidance, mentioning explicitly our tolerance for inflation overshooting…". Such a move, if adopted, would add to the dovish stance of ECB and pose further headwinds for the EUR.    

 

Key data releases for the remainder of this week       

  • USD: Retail Sales – Citi: 6.3%, median: 5.4%, prior: -3.0%; Retail Sales ex Auto – Citi: 4.9%, median: 4.8%, prior: -2.7%; Retail Sales ex Auto, Gas – Citi: 4.9%, median: 6.3%, prior: -3.3%; Retail Sales Control Group – Citi: 4.7%, median: 6.9%, prior: -3.5% - Citi analysts expect a strong rebound in retails in March with upside risks seen for many components in the retail control group. This could also help keep prices for various goods elevated after increases over the last year.
  • AUD: Australian March Labor Force: Citi 35k, Previous; +88.7k, Citi unemployment rate forecast; 5.6%, Previous; 5.8% - improvements in February/ March suggest another positive month for jobs. April and May data however could exhibit volatility from the end to JobKeeper 
  • CNH: China GDP (%YoY) 1Q: Citi 16.0, Consensus 18.9, Previous 6.5 – Citi analysts maintain their growth forecast for China at 16%YoY for 21Q1 with risks tilted to the upside. Manufacturing and services PMIs both accelerated more than expected in March, pointing to a strengthening in the growth momentum.             

 

This is an extract from the Daily Currency Update, dated April 15, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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