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Let's take a step back from the carnage seen early today from the RBNZ leaving it's OCR projections unchanged. For our RBNZ review, click here.

Looking past today's violent slump in the Kiwi and NZ 2yr swaps, the question is whether the market has over-reacted.

Even more pointedly, the question needs to be asked of whether the RBNZ is correct in being so downbeat about inflationary pressures ahead.

Gov Wheeler said earlier that for an OCR hike, inflationary expectations would need to rise.

  • While we will concede global inflationary pressures will abate if commodity prices sees a renewed sell-off, there are countervailing factors for NZ.
  • This comes in the form of a domestic economy that's still likely to grow above trend into 2018, which implicitly lends upside risk to wage growth in the mths ahead which in theory is an upside prop for inflation.
  • Note too that the NZD retreat (which Gov Wheeler is incidentally pleased about) will support inflationary pressures and at the very least, prevent a sharp decline in inflationary expectations.

In the cold light of day, we doubt the market will significantly drive down odds of a hike in Q1/Q2 2018, with most still forecasting tightening from May 2018.

  • Note that market pricing of a Mar 2018 hike has bounced from 54% in the direct aftermath of the RBNZ decision to 59.1% currently.

If upcoming data were to prove the RBNZ wrong, there is significantly more room now for the market to drive up NZ's 2yr swap rate and the NZD. JH

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