NZ: RBNZ OCR Review: No Change Expected
Data Flash (New Zealand)
Released 9.00am NZT, 4 July 2001
We expect the RBNZ to leave the overnight cash rate (OCR) unchanged at 5.75%, following the review on 4 July (9.00 pm GMT, 3 July).
The May statement suggested that the RBNZ had concluded that the domestic easing cycle was most likely at an end. The balance of recent revisions to trading partner GDP forecasts, domestic activity trends and latest inflation indicators is unlikely to have changed that view.
The market is pricing no move on 4 July, but a 25% chance of a 25 bp reduction in August.
Domestic data makes OCR move unlikely
Following the May rate cut, RBNZ Governor Brash commented that the decision had been between no cut and a 25 bp move. He added that the he had no bias going forward, suggesting that the Bank had come to the conclusion that the New Zealand easing cycle had most likely come to an end. Data released over the past month is unlikely to have changed that view:
Domestic data has, on balance, been more positive than expected by the RBNZ. While the Q1 GDP result (zero growth) was most likely weaker than the Bank's estimate, indicators for the June quarter and beyond have been relatively strong. The positive trend in retail sales continued in Q2, which is consistent with a level of consumer confidence that points to more than 3% growth in consumption going forward. Positive consumer sentiment has also been reflected in a significant rebound in housing turnover (up around 20% on last year). That suggests that residential construction will pick up with the usual lag in Q3, adding to an already strong trend in commercial construction activity. A recent employer survey has pointed to significant job and income growth over the next six months, while farm incomes have continued to benefit from high commodity prices and concerns about a drought have diminished significantly. While export volume growth had been generally disappointing, May trade data showed a strong increase in export values. We expect the price/volume split to add credibility to the RBNZ's view that export volumes will respond to the low NZ dollar with a significant lag. Reflecting the overall positive outlook for the economy, firms' aggregate assessment of trading prospects over the next 12 months (NBNZ survey) has remained consistent with around 3% GDP growth.
Trading partner growth outlook
The deterioration in trading partner growth prospects, as recorded by Consensus forecasts, was a key driver of the RBNZ's decisions to ease policy between March and May. Since then the aggregate trading partner growth outlook has remained unchanged at 2.3% for 2001 and at 3.4% for next year. It should be noted, however, that the downward revisions for Europe and Asia have been offset entirely by a favourable re-assessment of the largest trading partner, Australia.
Little new inflation data has become available since May. While the trend in import prices has been slightly lower than expected, continued high prices for food exports are increasingly feeding into domestic prices.
The weaker-than-expected Q1 GDP result implies that the weak trend in productivity growth has continued. On the other hand, the unemployment rate has fallen to a 13-year low, reflecting tight labour market conditions. Both factors point to increasing domestic inflation pressure going forward, which is consistent with the fact that the downward trend in surveyed pricing intentions and inflation expectations seems to be levelling off above levels that are consistent with a swift return of inflation into the RBNZ's desired 1-2% range.
Market likely to continue to price August move
The statement released by the RBNZ in conjunction with the rate decision is likely to refer to the positive domestic activity profile and the continued negative risk distribution surrounding the global outlook. As in May, we do not expect the Bank to state a policy bias. Nevertheless, the market is likely to continue to price a reasonable chance of one final rate cut when the next Monetary Policy Statement is released on 16 August. That is based on the expectation that global data will remain soft for a while and eventually cause domestic growth prospects to deteriorate. However, we consider the domestic activity profile to be sufficiently robust, with the low NZD and a strong increase in the terms of trade providing a powerful offset to the relatively weak international environment. Our central scenario remains that the New Zealand easing cycle has come to an end, with a first re-tightening step expected for March of next year.
Ulf Schoefisch, Chief Economist