RBNZ's Conway leaves October OCR fully open, sees hike as more likely

Conway’s remarks keep alive the possibility of a hike at the RBNZ's late-October meeting, a factor that should help the New Zealand dollar hold up against currencies whose expected rate path is heading lower, especially the Australian dollar after Thursday's poor jobs numbers. The differing outlooks make AUD/NZD a straightforward way to express the contrast between a dovish RBA and an RBNZ that remains hawkish. With the central bank refusing to tie its hands, each new batch of New Zealand data is likely to move pricing between a hold and a hike in the run-up to the decision. A continuing tightening bias also leaves little room for New Zealand yields to fall much further near term.

The signal from the central bank is that an increase is on the way, even if the timing is not yet specified.

Summary:

• Paul Conway, the RBNZ's chief economist, said the decision due in late October is “completely open”.
• The bank wants the flexibility to choose between keeping the rate on hold and raising it by 25 basis points.
• The OCR is still seen as most likely to move up, though the timing has not been settled.
• Recent changes in oil and the New Zealand dollar have increased near-term inflation pressure.
• The RBNZ expects inflation to ease back into its 1% to 3% target band next year.

The RBNZ's next policy announcement, due in late October, is “completely open”, according to chief economist Paul Conway, who again said the official cash rate stands a better chance of going up than down.

On the sidelines of the IMF and World Bank meetings in Bangkok, Conway explained that the bank wants to avoid choosing prematurely between holding the rate and increasing it by 25 basis points. He added that the next OCR move is still more likely to be up, but the point at which that happens has not been decided.

Conway pointed to recent moves in oil prices and the New Zealand dollar as factors that have increased inflation pressure over the short term. Even with that, he said, the RBNZ is still confident inflation will fall back within the 1% to 3% target band next year.

Those remarks make the October decision a close call. Calling the meeting “completely open” meant Conway did not lock the bank into a hike, while his repeated tightening bias makes clear that a reduction is not under consideration. That leaves the RBNZ free to react to fresh data, including inflation numbers, in the run-up to the announcement.

The RBNZ's position is an outlier compared with other shifts around the region. Thursday's softer Australian jobs numbers prompted traders across the Tasman to lower the odds of a November RBA hike to about 15%. In the US, a firmer inflation reading has led markets to price in a strong chance of a Federal Reserve rate increase in December.

For the late-October meeting, the main question is whether the RBNZ needs to act now because of short-term price pressures from energy and the New Zealand dollar, or whether its confidence that inflation will return to target next year gives it room to wait a little longer.