RBNZ Monetary Policy Statement - May 2001

Data Flash (New Zealand)

Key points

The RBNZ lowered the official cash rate by 25 bps to 5.75%.

At Parliament's Finance Committee hearing Governor Brash clarified later that the decision had been between no cut or cutting by 25 bps.

He noted that, going forward, the RBNZ did not have a policy bias either way, suggesting a strong possibility that New Zealand's easing cycle is finished. While the slowdown in global growth was again the key driver of the cash rate decision, the Bank emphasised opposing influences on the outlook for inflation: the widely expected rebound in global growth (the RBNZ uses international Consensus forecasts);

optimism by local businesses regarding their own trading prospects; continued strength in prices for NZ commodities;

the low NZ dollar; as well as high capacity utilisation (zero output gap) and the tight domestic labour market.

The Bank revised up its outlook for inflation over the year to March 2002 from 1.4% to 2.3%.

In order to illustrate the point that risks around the interest rate outlook are broadly balanced, the RBNZ presented various alternative scenarios, with implied cash rates varying from around 5.0% to 6.5%.

Unnecessary confusion was generated by the 90 day rate track in the central forecast scenario, which seemed to imply a stable cash rate over the remainder of this year, but a further rate reduction in 2002 (see table below). Governor Brash dismissed this rather implausible profile as a purely model generated track, with the underlying small rate variation amplified by the RBNZ's rounding convention. Dr Brash said the projection contained no information about the Bank's thinking about further cash rate moves.

The RBNZ has remained relatively upbeat about prospects for the domestic economy (average growth of 3% p.a.), stressing the stimulatory impact of the low NZD and the broadly neutral level of interest rates. It appears that the Bank has revised down its estimate of a neutral cash rate from 6.25/6.50% to 6.0%.

Despite the RBNZ's attempt to deliver a balanced statement, the market still took a mildly bullish view. A 75% probability of a 25 bps rate cut is priced for 4 July.

The NZD did not show a noticeable reaction.

Our assessment

Governor Brash's comment that the Bank seriously contemplated not cutting the OCR today shows that the pros and cons for a continuation of the easing cycle are getting more finely balanced. With the global growth cycle showing signs of bottoming out, the key driving force behind the RBNZ's interest rate decisions is weakening. On the other hand, domestic inflation concerns are assuming a more prominent role.

The RBNZ revised up its near-term inflation outlook by almost a full percentage point, due mainly to a reassessment of external price pressure and high domestic capacity utilisation. Had the Bank been able to also incorporate last week's higher-than-expected wage data into this forecast round, the upward revision to the CPI outlook would have been even more pronounced. The wage data confirmed that the Bank's concerns about domestic inflation pressure are very real.

It is our view at this point that the New Zealand easing cycle is finished (70% probability). However, if there is another rate cut, it appears more probable that it will occur on 15 August rather than 4 July. With the RBNZ concerned about underlying inflation trends, the Bank is likely to want to wait at least for the next CPI (16 July) and Q2 wage data (3 August).

Ends

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