RBNZ Monetary Policy Statement
Data Flash (New Zealand) RBNZ Monetary Policy Statement
To be released at 9.00am NZT, 6 December 2000 29 November 2000
The RBNZ announced today several changes to the presentation of the MPS: All projections, except the first two quarter' CPI inflation forecasts, will be rounded to the nearest half percent.
Quarterly GDP projections will no longer be published.
Less detail will be provided regarding the projections for the world outlook, household accounts, fiscal accounts, as well as the current account. The MCI will be removed from the forecast tables.
While the changes are intended to increase the focus on the substantive medium-term factors that drive the Bank's decision-making, the markets will nevertheless concentrate on the near-term projections for interest and exchange rates. The fact that, for example, 90 day rate projections of 6.8% and 7.2%, are both going to be printed as 7% removes significant information content regarding the RBNZ's projected near-term policy course from the MPS. While that may be exactly what is intended, it introduces more uncertainty about the interpretation of projections and could potentially lead to higher volatility in financial market prices.
A presentational change has also been announced for the interim cash rate reviews. Unlike previously, a brief commentary on the decision will from now on be provided even if the cash rate is left unchanged. We expect the RBNZ to leave the OCR unchanged at 6.50% on 6 December, but maintain its projection of a further rise in 90 day rates over the next year. The TWI depreciation since the August MPS (around 8%) is causing significant additional inflation pressure. As a result, we expect the RBNZ to revise the forecast peak of the CPI cycle from 2.9% to 3.6%.
Based on the assumption of falling oil prices and a strengthening NZD (based partly on a significant current account improvement), the RBNZ is likely to maintain its projection of a relatively rapid decline of CPI inflation from its peak to an annual rate of 2% by early 2002.
The stronger-than-expected decline in Q2 GDP has implied a lower level of activity and is providing an offset to increased inflation pressure in the near term. However, due to the downward revision of the NZD track, we expect the medium-term, growth forecast to be lifted to 3.5% p.a. over the next two years. That implies an unchanged output gap projection for the end of the forecast period (around +0.8% of GDP).
Given the CPI profile, a tight labour market and the forecast recovery in growth, the RBNZ is expected to issue another firm warning regarding second-round inflation effects. Putting the outlook in the context of the two alternative growth and policy scenarios the RBNZ published in August, recent evidence of a recovery in confidence and activity favours the `stronger growth - need to tighten further' scenario. However, the Bank is likely to argue that evidence is still tentative at this stage and that the possibility of a hard landing of the international economy suggests that it is prudent to leave the cash rate unchanged until the picture becomes clearer.
We expect a substantial portion of the MPS to be devoted to explaining the factors behind the forecast breach of the 0-3% inflation target range and to justifying the relaxed attitude towards the first-round effects of the one-off factors that are impacting on the CPI. The Bank is likely to present various measures of core inflation in an attempt to strip out the influences of oil prices, the NZD, and higher tobacco taxes on the CPI. The market is pricing only a 75% chance of a 25 bps tightening by March. Given RBNZ concerns about potential upside risks to the inflation outlook, we consider the risk distribution around current bill yields to be biased upwards. Little effect on long bonds is expected from the MPS. Considering firmer data in recent months, we consider it less likely now that NZD would suffer from a slightly firmer-than-expected RBNZ tone.
Ulf Schoefisch, Chief Economist, +64 9 351 1375
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