New Zealand Dollar Sinks as RBNZ Deputy Governor Hints at Rate Cut

NEW ZEALAND DOLLAR, RBNZ - TALKING POINTS:

• New Zealand Dollar down after RBNZs Bascand hints at a rate cut

• Easing may be needed as new bank capital rules boost lending cost

• Priced-in 2019 market view puts chance of easing at 20-30 percent

The New Zealand Dollar plunged after RBNZ Deputy Governor Geoff Bascand said proposals to increase bank capital requirements may lead to tighter credit conditions. He reasoned that this might in turn lead to higher borrowing costs, pushing down inflation and forcing the central bank to cut the benchmark lending rate to meet its statutory objectives.

Officials are proposing that banks raise the minimum for high-quality Tier 1 capital to 16 percent of overall risk-weighed assets. That would nearly double the current regulatory floor. While theyve argued this will make for a more resilient banking system, lenders have balked. They are due to submit feedback on the scheme by early May, with RBNZ making a final decision on the scheme thereafter.

Chart created using TradingView

As it stands, priced-in market expectations for RBNZ policy implied in interest rate futures suggest traders do not expect the central bank to act this year. That makes sense: Governor Adrian Orr pointedly predicted no rate moves for the next two years. If a change does happen however, investors think it is more likely to be a cut than a hike. They put the likelihood of such an outcome at about 20-30 percent.