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RBNZ: downside risks incorporated, still on hold

RBNZ: downside risks incorporated in view, but still staunchly on hold

As expected, the RBNZ this morning left the OCR unchanged and delivered a neutral commentary. The commentary acknowledged the significant deterioration in the growth outlook, whilst maintaining a hard line on upside risks to inflation.

In the opening paragraph the RBNZ focussed on the intensifying downside risks to growth from a crumbling housing market (weaker prices, activity, and construction), the drought in Waikato (NZ's major dairy producing region) tighter credit conditions, and weaker prospects for growth. Domestic demand 'appears to have waned'. Furthermore, the drought took 0.2% off 1Q and 0.3% pts off 2Q growth forecasts.

What they took away with one hand, they gave back with the other, however, with inflation risks still paramount. The focus was again on inflation generated by the new emmissions trading scheme, fiscal policy largesse, and rising commodity prices.

The RBNZ inserted a table disclosing both upside and downside risks to policy.

The commentary was as expected and should be read as neutral. Although the acknowledgement of significant downside risks to growth is a slight step down for the central bank, they still consider themselves to be a long way away from being in the position to ease. Unlike the Fed, the RBNZ is not a risk manager but a stringent inflation targeter. The RBNZ is on hold for at least the next two quarters, and in our view into early 2009.


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