One of our signal providers, a current FX hedge fund manager, believes that the RBNZ could be laying the foundation for rate cuts.
Here is what he has to say excerpted from a strategy note to FX Renew members.
The RBNZ have tightened rates too far, and if they were to stick to their mandate then they should in fact be cutting rates, like the rest of the world’s Central Banks. The problem however is that the NZ economy is running at full steam, and more to the point, the Auckland (NZs largest city) property market is on steroids. Any hint of cutting interest rates risks fuelling another round of property price inflation.
The dilemma is clear – raise rates to curb the property market runs the risk of shifting into a deflationary environment, and the NZD soaring. Cutting rates addresses the inflation problem, but fuels the property market and puts the NZ financial system at risk as borrowers overextend now with very little buffer when the good times inevitably end.
The solution is the introduction of macroprudential (mac-pru) measures. A quick primer can be read here:
In a nutshell mac-pru tools are designed to prevent systemic risk – but in essence what that means for the layman is that they have the effect of curbing an appreciating asset market (in this case property) by imposing certain restrictions. In doing so mac-pru tools then allow the RBNZ, to a certain degree, to focus their monetary policy on returning inflation back into the 1-3% band. That is, it gives them more flexibility to cut interest rates to spur inflation, without having to worry so much about the property market implications
Whilst not strictly a mac-pru tool in its purest definition, the announcement out today will have the same effect. Should the proposals laid out come into effect, we can expect a lot of the froth to be removed from the property market, thus paving the way for the RBNZ to cut rates further.
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About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.
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