ASB:
The RBNZ kept the RBNZ on hold at 2.5% as expected.  Heading into the MPS was a lot of focus on whether the RBNZ would validate a general, but fraying, consensus that the OCR will first increase in March next year.  Markets had increasingly priced in a chance of an OCR increase in January.  In contrast, we saw the risks to our own March view as skewed to a later than earlier start.  The outcome of the MPS, and a tentative US Budget agreement, make us more comfortable with our view the OCR will first rise in March.  We see the risks as more balanced than they were, although still see a January OCR increase as having several hurdles to clear and of lower probability than what market pricing carried into the meeting.
The main change to the RBNZ’s forecasts is the expected upward revision to the NZ dollar Trade Weighted Index (TWI).  However, the RBNZ saw higher terms of trade and stronger domestic demand pressures as broadly offsetting the impact of the stronger TWI.  The 90-day rate track continues to imply a March/April OCR increase.   
We continue to expect 75bp of OCR increases in 2014 and 75bp in 2015, with the OCR reaching 4% by December 2015.  Market pricing remains on the high side of our expectations. Key factors to keep an eye on going forward are: when the Federal Reserve ‘tapers’ its asset purchases – and what impact that has on the NZD/USD; next week’s Q3 GDP figures; any convincing signs that the LVR restrictions are biting into house sales and prices.

JP Morgan:
RBNZ Governor Wheeler today made good on his pledge to leave the OCR unchanged through 2013. The policy assessment and Monetary Policy Statement (MPS) were sunny, as they have been for some time. There were some murmurs the RBNZ would use this occasion to position for a very early start to the hiking cycle in 2014, perhaps in January, but the commentary did not go so far as to endorse this.

Officials certainly have conviction that the recovery is on a firm footing, with the expansion now described as having “considerable momentum”. But this is acting to increase their (presumably, probability weighted) estimate of the total amount of work to be done in the cycle, rather than adding a sense of increased urgency to get the hiking cycle underway. Inflation is coming back to target gradually, price pressures appear contained to Canterbury, where earthquake reconstruction is gathering pace, and officials have conviction that LVR restrictions will put a lid on housing. In the press conference, Governor Wheeler stated that a rate hike was “not considered”, which is a pretty firm indication that officials are not itching to hike.

The new forecast round was a mixed bag. We expected the most significant moving part of the forecasts today to be the TWI assumption, which had been on the low side in September, and was responsible for the steepness of the bank bill projections at that time. The TWI assumptions needed to rise a few percent to realign with the recent trading range, and this is what we got, but the bank bill path was not lowered symmetrically. In fact, the bill forecasts were raised a little, to now imply 225bp of hikes by 1Q16.

The insensitivity of the policy path to tighter currency settings breaks with recent tradition, where there has been a quite explicit trade-off. The MPS states that “this reflects the view that the terms of trade and domestic demand are somewhat stronger than foreseen in September.” Not surprisingly then, the growth forecasts are a touch higher, adding a cumulative 0.4% of GDP growth out to 1Q16, though most of the upgrade lands in 2015. But the more interesting development here is the increased weight placed on the terms of trade as an input to the policy decision.

Indeed, few expected dairy prices to stay in such lofty territory after the drought effects that took them there have faded away. Farmers are now getting the best of both worlds, as “export commodity prices remain very high, and dairy production has rebounded strongly.” The official assumption is that the terms of trade normalize somewhat, but the MPS includes a simulation where they stay at current levels, as indicated by forward prices in global dairy markets. This would lift the policy path even further, despite the implied higher TWI track. The fact that the shock to the TWI is fundamental, rather than a portfolio shock as presumably assumed in September, and in a similar simulation in the June MPS, also helps explain the higher bill track in this week’s baseline scenario.

While the link between the equilibrium terms of trade and currency in small open economies is well established, there is a bit of a sense that the RBNZ is having its cake and eating it too here. The currency has been repeatedly described as “overvalued” and “not sustainable” (and is again today), and yet marginal increases are being framed as being grounded in the fundamentals of a 40 year high terms of trade. It remains to be seen whether the latter view sticks, but clearly if the staff now see the terms of trade as another factor (along with housing market dynamics and above trend growth) that monetary policy should lean into next year, then dairy price outcomes should take on increased significance over the next few months.

With January seemingly off the table, the first rate hike is likely to come at either the March, April, or June meetings next year (there are no meetings in February or May). Our preference has been for June, since the RBNZ’s LVR restrictions appear to be having the intended effects, and the stated point of these measures is that they give the Bank “flexibility” on rates. LVR restrictions are therefore likely to be given time to work, and the natural forum to declare a judgment on what the effect has been, before recalibrating the monetary policy path, is the May Financial Stability Review.

However, we are wary of the fact that another variable has re-entered the monetary equation today – the terms of trade – and continued strength there could bias Governor Wheeler to earlier action. In trying to balance an equation where the list of inputs keeps growing, and all are sitting at their extremes (house prices and terms of trade vs currency), while simultaneously adding more tools into the policy kit (currency jawboning, intervention, LVR restrictions) there will be a lot going on in 2014

Westpac
The RBNZ’s Monetary Policy Statement was slightly hawkish compared to market expectations.

The main surprise was no signal for a January hike, the market earlier pricing in +8bp. However, the 90-day interest rate forecast was revised higher, by 8bp in the March 2014 quarter and by 23bp in the March 2015 quarter. This implies the RBNZ expects to start hiking in March 2014.

Much of the body of the statement was similar in spirit to previous missives. A notable addition to the policy paragraph was the inclusion of commodity prices as another factor to consider regarding the tightening cycle (previous factors were the exchange rate, construction activity and the house market).
Markets quickly removed much of the pricing for the January meeting and bank bill futures fell 3bp. Term swap rates are as yet unchanged. NZD/USD rose from 0.8233 to 0.8287 in response, and AUD/NZD fell from 1.1010 to 1.0948.

We expect NZ term swap rates to eventually rise. The 2yr should remain anchored around 3.72% because a March hike had already been fully priced, but the 5yr rate should rise slightly to 2.60% and the 10yr could rise to 5.20%. The curve should thus steepen, mainly in the belly. The MPS is neutral for swap spreads.

NZD/USD should extend the positive response towards 0.8330, while AUD/NZD threatens to break below 1.0950, which is a five year low.

HSBC
The RBNZ left its cash rate unchanged at 2.50%. The RBNZ clearly signalled a tightening bias, although the statement was quite cautious. While they steepened the slope of their profile for the interest rate outlook slightly, they still expect that the first hike won't arrive until Q214. A key factor constraining their enthusiasm remains the high NZD, which they see as a 'headwind for the tradables sector'. With the economy at the beginning of a boom and inflationary pressures likely to build from here, we expect the RBNZ may start lifting rates a little earlier than they are currently signalling.
Facts
- The RBNZ left its overnight cash rate unchanged at 2.50%, as expected.
- On the policy outlook, the RBNZ noted ‘the Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint.’
- Their outlook for 90-day interest rates was revised slightly higher, although they continued to signal that they expect rate hikes to begin from Q2 2014 (unchanged from the September official statement).
- The central bank projects slighter stronger growth in the near-term although the growth outlook has been revised slightly lower through 2014. At the same time, the RBNZ revised down their outlook for inflation through 2014, partly reflecting a stronger outlook for the NZD.
Implications
The New Zealand economy looks to be expanding solidly, with the Canterbury rebuild, strong export prices and a housing market boom providing a significant boost to demand.
In recognition of these factors the RBNZ noted in today’s official statement that they ‘will increase the OCR as needed’ to meet their inflation objective. At the same time, however, they were fairly cautious in their forecasts. While they revised their Q3 GDP estimates higher, their outlook for growth through 2014 is now more modest and while they now see a slightly steeper upward slope to their expected cash rate profile, they still expect that the first hike will not come until Q2 next year (unchanged from their September official statement). The key factor holding back their enthusiasm remains the high NZD, which they noted is acting as a significant headwind for the external sector.
In our view, the RBNZ may need to raise rates earlier than mid-2014 as the economy has more momentum than the RBNZ is currently assuming. We expect the RBNZ may be surprised on the upside when it comes to the near term growth and inflation outlooks. The central bank is also assuming inflation remains well contained over the next 18 months, rising only gradually to the centre of the target band. We expect continued strength in the housing market, and greater spill-over into activity and inflation from the Canterbury rebuild will result in greater cost-pressure than the RBNZ is currently factoring in.
Overall, with an economy that looks to be expanding at a rapid pace, and already running up against capacity, rate hikes will soon be required to keep medium-term inflation in check. We expect the first rate hike from the RBNZ to come in Q1 next year.
Bottom line
The RBNZ kept rates unchanged at 2.50%, as expected.
The central bank was cautious about the extent of pick-up in domestic activity, continuing to signal rate hikes from around Q2 next year.
Overall, we expect strong growth and rising inflation pressure will result in an earlier move from the RBNZ, with rate hikes likely from Q1 next year.