Conway’s comments keep a late-October hike live, which should support the New Zealand dollar against currencies where rate expectations are falling, most notably the Australian dollar after Thursday’s weak jobs report. That divergence makes AUD/NZD a natural expression of the gap between a dovish-leaning RBA and a still-hawkish RBNZ. By declining to commit, the RBNZ leaves markets highly sensitive to the next round of New Zealand data, so expect pricing to swing between a hold and a hike before the decision. A firm tightening bias also limits the scope for New Zealand yields to fall much further in the near term.

- The RBNZ wants the market to know a hike is coming, just not necessarily when.

Summary:

• RBNZ chief economist Conway said the late-October rate decision is “completely open”
• The bank wants optionality between holding and a 25bp hike
• The RBNZ still sees the OCR as most likely to rise, but has not decided on timing
• Recent moves in oil and the NZD have added short-term upward pressure on inflation
• The bank remains confident inflation will slow to its 1% to 3% target band next year

The Reserve Bank of New Zealand’s next interest rate decision in late October is “completely open”, chief economist Paul Conway said, while repeating that the central bank still sees the official cash rate as more likely to rise than fall.

Speaking on the sidelines of the IMF and World Bank meetings in Bangkok, Conway said the bank wants to keep its options open between holding the rate steady and raising it by 25 basis points. The RBNZ continues to see the next move in the OCR as most likely to be higher, he said, but it has not decided on timing.

Conway said recent moves in oil prices and the New Zealand dollar have added to inflation pressure in the short term. Even so, the bank remains confident that inflation will slow back into its 1% to 3% target band next year.

The comments leave the October decision finely balanced. By describing the meeting as completely open, Conway avoided pre-committing the bank to a hike, while his reaffirmation of a tightening bias makes clear that a cut is not on the table. That gives the RBNZ room to respond to incoming data, including inflation figures, before the announcement.

The RBNZ’s stance stands out against shifts elsewhere in the region. Across the Tasman, softer Australian jobs data on Thursday prompted traders to cut the odds of a November Reserve Bank of Australia hike to around 15%. In the United States, a hotter inflation report has pushed markets to price a strong chance of a Federal Reserve hike in December.

The key question for the late-October meeting is whether short-term price pressures from energy and the currency prove strong enough to justify acting now, or whether the bank’s confidence in inflation returning to target next year allows it to wait a little longer.

This article was written by Eamonn Sheridan at investinglive.com.

Source: Investing Live - Central Bank