RBNZ Monetary Policy Statement
Data Flash (New Zealand)
6 December 2000
Key points The RBNZ left the official cash rate unchanged at 6.5%, but produced a significantly more hawkish Statement than expected by the market.
The Bank has revised up its projection of further cash rate tightening steps from around 50 bps to 100 bps over the next 18 months.
A 25 bps move in March is the most likely starting point for the additional series of cash rate hikes, although Governor Brash has not ruled out a move on 24 January if data surprise on the upside.
The RBNZ's hawkish statement is consistent with the upward revision of the CPI inflation peak from 2.9% to 3.8% and the view that the risks around the swift renewed fall to 2% by early 2001 are on the upside.
In the light of recent confidence indicators, the RBNZ has practically discarded the `weak economy scenario' mentioned in the August MPS. The Bank notes that, considering the significant further weakening of the NZD since August and the assumption that the TWI will only rise by another 6% over the next two years, its growth forecasts of 3Ÿ % p.a. over coming years may be too conservative. That upside risk provides an offset to the downside risk of the international economy slowing faster than expected. The Bank's outlook assumes a soft landing for the world economy - consistent with the current consensus of most international forecasters, including Deutsche Bank.
Concerns about the inflation outlook arise from the fact that the domestic economy is operating close to full capacity, with a positive output gap projected to open up over the next year. That makes it easier for businesses to pass on significant import price increases.
Significant risk is also associated with the RBNZ's assumption that there will be no second-round wage inflation effects following the inflation spike, despite sub-6% unemployment and significant skill shortages.
Market reaction and Deutsche Bank assessment The NZD weakened slightly following the Statement (down 20 bps to 0.4200), reflecting the market's view that the RBNZ has been overly hawkish. Bill futures hardly reacted (up between 2 and 5 yield points), reflecting the fact that the RBNZ's hawkishness is viewed as lacking credibility, given the current international backdrop. However, the mid-part of the bond curve showed a somewhat stronger reaction. 04/03 yields rose 7 bps after the Statement. The general outlook presented by the RBNZ is broadly in line with our own thinking. While a rise in the cash rate to 7.5% may look extreme in a situation where other central banks are expected to ease policy, the NZ settings are different in many respects:growth is strengthening, not softening; the economy has suffered a significant external cost shock; productivity growth is far below the international average; and the medium-term NZ inflation target (1.5%) is lower than those of most other central banks.
As a result of those factors, the inflation threat is greater and a more vigorous policy reaction should be expected. Nevertheless, given the international backdrop, the risk distribution around the projected interest rate track appears to be skewed to the downside.
Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351 1375
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