The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 28 April.
Although we think the decision will be a very close call, we believe the downside risks to the Bank’s inflation forecast have increased due to the continued strong and slightly overvalued NZD, and that this will be enough to force the RBNZ to cut rates.
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We acknowledge that the RBNZ would likely prefer to wait until June to coincide with the next release of the Monetary Policy Statement.
There is very little being priced in in terms of likelihood of a cut, only about 7bp. Given how close we believe the decision will be, we see the risk-reward as clearly favouring being short NZD going into the meeting. Even if the RBNZ keeps rates on hold, we expect the Bank to remain vocal about the fact that NZD remains overvalued and so limit any NZD strength. It is not clear whether this will be enough to stop the NZD appreciation trend, as the positive risk environment could continue to push NZD higher after the initial reaction.