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NZ: RBNZ leaves OCR at 5.75%

Data Flash (New Zealand)

Key points

As expected by the market and most market economists, the RBNZ left its official cash rate unchanged at 5.75%. The RBNZ issued a short statement - reproduced overleaf - setting out the rationale for this decision.

The rationale for the Bank's decision was staright-forward and consistent with our own analysis.

Although growth prospects for many of New Zealand's smaller trading partners have been revised down, the potential economic impact on the New Zealand economy has been offset by upward revisions to growth prospects in Australia.

In addition, recent data suggests that, although evidence of a robust recovery is still to eventuate, the probability of a `double-dip' in the US economy is receding. Moreover, the prices obtained for New Zealand's export commodities remain very robust (helped by continued weakness in the NZD).

Although Q1 GDP growth was weaker than expected, the impact on the Bank's estimate of the output gap was partially offset by upward revisions to previous quarters. And although investment in Q1 was weak (in our view a delayed reaction to last year's pessimism, and likely to have been substantially reversed in Q2) , consumer spending has remained relatively strong.

The Bank concluded, therefore, that overall pressures on inflation have not changed much since the May Monetary Policy Statement (MPS).

Looking ahead to the August MPS, the Bank noted that there was some risk that the global slowdown was having a greater impact on export volumes than its forecasts had assumed. As we have noted in our commentary on recent trade releases, outside of the primary sector, growth in export volumes has been disappointingly weak. Export values in the non-primary sector were especially weak in April. While aggregate exports in May were extremely strong, whether this was due to a bounceback in non-primary exports will not be known until 12 July. We think export volumes (for goods) have grown by around 3% qoq in Q2 following a flat Q1. We maintain our central view that the New Zealand easing cycle concluded on 16 May. However, there is clearly still a substantial risk - perhaps 25% - that the RBNZ will choose to make one final 25bps cut on 15 August as further insurance against potential downside risks to the economy. Over the next six weeks, the RBNZ will gain access to a range of important local data, as well as further information on the health of the global economy. The local data includes:

the merchandise exports breakdown for May and June - the RBNZ will be looking for some recoverly in non-primary exports following the weak outcome in April, so as to ease their concerns about the export sector ;

imports for June and July - the RBNZ will be looking for further signs of the bounce-back in capital spending that appears to have occurred in May;

retail sales for May and June - the RBNZ will be looking for a continuation of recent robust outcomes;

the Q2 QSBO and July NBNZ survey - the RBNZ will be looking for further evidence that confidence is remaining robust;

the QES and LCI for Q2 - the RBNZ's main interest will be in whether the 1.5% qoq increase in private sector wages in Q1 represented the beginnings of a stronger uptrend in wage growth than assumed in its May forecasts (the Bank's May forecasts saw wage inflation peaking at around 3.5% - we see wage inflation going to 4% and staying there for an extended period, consistent with a tight labour market); and

the HLFS for Q2 - the RBNZ will be looking at the employment and hours worked series for any additional clues about the strength of rebound in GDP in Q2 after the weaker than expected Q1 outcome.

RBNZ Statement: OCR unchanged at 5.75 per cent

The Reserve Bank today left the Official Cash Rate unchanged at 5.75 per cent.

Reserve Bank Governor Don Brash commented: "Inflation pressures since the OCR was reduced to 5.75 per cent in May are largely unchanged.

"The world economy is weak. The short-term outlook for most of our trading partners is deteriorating, although there are better signs in Australia. However, offsetting these factors, most export prices remain high, partly because of the low exchange rate.

"Investment in New Zealand has been relatively weak, but consumer spending has remained relatively robust. Overall, inflationary pressures don't seem to have changed much. In the May 2001 Monetary Policy Statement, we thought these pressures were roughly neutral. Many inflation measures are still higher than is consistent with our target, but most of the recent signs suggest inflation will fall back into the target range over the next year or so.

"There are, however, risks. March GDP growth was slightly weaker than expected, although previous quarters were revised up, reducing the impact of the March number. The fact that export volumes have not responded strongly to the low dollar and high world prices may mean that the global slowdown is having more impact that previously thought. Whether these downside risks warrant a further cut in the OCR will be re-examined in the August Monetary Policy Statement," Dr Brash concluded.

Darren Gibbs, Senior Economist, New Zealand

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