NZ: RBNZ Monetary Policy Statement - Preview
Data Flash (New Zealand) - Preview
(to be released at 9.00am NZT, 14 March 2001) 7 March 2001
We expect the RBNZ to leave the OCR unchanged at 6.50%.
Moreover, the Bank is likely to project the OCR remaining unchanged this year, followed by a modest tightening to 7.0% during 2002. That compares to the previous outlook of a 100 bps rate hike by early next year.
The interest rate outlook is expected to be based on a lower growth profile than previously projected (2-3% growth over the next 12 months, compared to 4%). Lower export forecasts will more than offset the stronger-than-expected momentum of domestic demand. [It should be noted, that, given weak productivity growth and significant negative net migration, even growth of only 2% may not generate any spare capacity.]
A projected tightening in 2002 will be viewed by the Bank as consistent with the forecast of a medium-term recovery in world growth and the need to `lean against the wind' at that stage. The RBNZ is likely to show inflation falling back to 1.5% by late 2001 and staying around that level thereafter.
In defence of its decision to not follow other central banks in cutting rates, the Bank is likely to point to the different cyclical position of the NZ economy and the run of strong data over recent months.
However, the RBNZ is likely to emphasise that global uncertainties imply that the risks to the central growth, inflation and interest rate projections for 2001 are clearly on the downside.
With the forecasts significantly based on the international Consensus view of a reasonable recovery of the US economy in H2/2001, the RBNZ will emphasise that worse-than-expected global data over coming months may convince it to lower the OCR at a later stage. Overall, while the lack of a rate cut will be viewed as hawkish by the markets, the RBNZ is expected to balance that with its dovish risk assessment. Currently the market is pricing around a 50% chance of a 25 bps rate cut on 14 March. We would attach only a 35% probability to such a move.
The key to the overall market reaction and rally potential for fixed interest markets will be the tone of the statement, with the actual rate decision determining the steepness of the bill curve. If the RBNZ does not ease, the market will expect more action later. Consistent with our forecasts, the front bill contract will suffer on 14 March, while the remainder of the curve should strengthen.
The NZD may suffer initially from a dovish RBNZ statement and the outlook for lower interest rate differentials, as the experience of the AUD suggests. However, the currency may get some residual benefit over time as international investors gain confidence that the RBNZ will act to support domestic growth if necessary.
Ulf Schoefisch, Chief Economist, +64 9 351 1375