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RBNZ: More lukewarm on recent currency strength than RBA

-->RBNZ: More lukewarm on recent currency strength than RBA                   
  • NZD: RBNZ leaves all policy levers unchanged in its February MPS yesterday in line with Citi analysts and consensus expectations (cash rate (OCR) at 0.25%, its LSAP (asset purchase) program of NZ$100bn by June 2022 and its FLP unchanged). The MPS’s tone however is dovish, suggesting that … “inflation and employment would likely remain below their remit targets over the medium term in the absence of prolonged monetary stimulus”. However, the RBNZ also admits the NZ economy has outperformed expectations and the MPS concedes that “risks to the economic outlook are balanced.” This is a more positive tone from the November MPS. There is also a relatively lukewarm comment on recent NZD appreciation with RBNZ merely mentioning international prices for NZ’s exports support export incomes, although the NZD exchange rate has offset some of this support.          

  • NZD: RNBZ revises up its NZ economic forecasts with the unemployment rate now expected to rise “only modestly” to 5.0% in 2021 and 5.1% in 2022 before starting to decline compare this to the November MPS forecasts for the unemployment rate to rise to 6.2% and 6.1% respectively. On inflation, the MPS expects the CPI inflation will reach 2.5% by mid-year but likely due to one-off factors like higher oil prices. As the RBNZ notes, the “robust housing market will support inflation in the near-term”, because housing related components account for over a fifth of the CPI basket. The Bank however, expects CPI inflation will eventually decline to below 2% later this year and not exceed 2% before Q4 2023.    

  • NZD: RBNZ attempts to maintain an easing bias by keeping its doors open to negative interest rates and attempting to quell talk of tightening by noting that it “would not change the stance of monetary policy until it has confidence that it is sustainably achieving consumer price inflation and employment objectives…gaining this confidence will take considerable time and patience”. The RBNZ also “agrees that it is prepared to lower the OCR to provide additional stimulus if required”, despite conceding that the marginal benefits of NIRP (negative rates) are low.  

  • NZD: A shift towards state contingent, not time contingent, forward guidance - another notable exclusion from the MPS is explicit guidance on the OCR, as per the March 2020 statement in which the RBNZ had stated it didn’t expect to change the OCR for at least “12 months”. Now, OCR guidance becomes “state contingent”, rather than time-contingent. Citi analysts retain their long-held forecast of no further cuts to the OCR as the “risks to the outlook are balanced” and that the OCR will likely remain at its current level until Q1 2023.      

 

Key data/ events overnight: German Chancellor Merkel sees Germany in third wave of the pandemic   

  • EUR: The overnight news however does little favor for EUR as German Chancellor Merkel sees Germany in third wave of the pandemic – according to the laboratory federation ALM, the share of the B.1.1.7 variant has risen to 30% last week (from 22% in early February and 6% in late January). Ahead of the next meeting with the 16 state leaders on 3 March, the Chancellor wants a cautious re-opening to avoid having to close again quickly. Also note that the German health ministry’s plan to offer free rapid tests from 1 March is delayed.       

 

Citi analysts: Where are the Bank of England’s pain thresholds? 

  • GBP: BoE Governor Bailey’s Treasury Committee hearing overnight is focused more on warnings about the EU’s aim to move derivatives clearing business beyond euro-based instruments from London to the EU that the recent sharp rise in gilt yields and sterling since the February MPC meeting. Citi analyst however do think there probably are pain thresholds on the speed and level of the rise but likely higher than now. This is especially true for Governor Bailey, who seems bullish on the UK economic outlook overall and on “scarring” in particular and should thus not mind a moderate tightening of financial conditions in the UK. Note however that Citi analysts do not share Governor Bailey’s optimism, expecting UK data to improve further over the coming months, before potentially stagnating around the middle of the year as the economic rebound proves disappointing.

  • GBP: In terms of tools, the current QE program is not designed to be used to push against rising gilt yields, because it does not have upward flexibility in size or pace of purchases. Negative rates are not available until August. That leaves guidance on rates or other forms of verbal intervention. The hearing also re-affirms that the MPC remains a long way from yield curve control with MPC members not resisting rising yields nor have they the flexible tools necessary to do so.  

  • GBP: No money fiscal coordination? – The MPC does not share our view that fiscal policy with monetary support is the best approach to return inflation to target quickly (on the contrary, Bailey says there would be a time for fiscal policy to “become more targeted”). The MPC committee does not see policy at the lower bound yet, on rates and/or purchases. Cautious on forecasts other MPC members though are more circumspect on the economic outlook than the Governor with Broadbent indicating that a rise in unemployment after the end of the furloughing program would be a key risk while according to Gertjan Vlieghe, the key uncertainty is no longer rebound timing but its completeness. Meanwhile, Jonathan Haskel stresses survey data that points to 70% of households would likely hang on to pandemic savings and notes February’s DMP data showing 43% of firms identifying Brexit as a top three source of uncertainty – similar to 2020 despite the deal. No inflation concerns yet the hearing does not reveal any concern with high inflation yet (including in the US), suggesting MPC members are not yet thinking about an exit strategy (despite commissioning a review). BoE Deputy Governor Broadbent says inflation expectations in the UK (despite being the highest within the G10) “are not worrying”.   

 

This is an extract from the Daily Currency Update, dated February 25, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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