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Reserve Bank tipped to hold and stick to neutral bias

Reserve Bank tipped to stay on hold and stick to neutral bias

By Rebecca Howard

June 16 (BusinessDesk) – Reserve Bank governor Graeme Wheeler is expected to keep rates on hold at next week's review and stick firmly to a neutral stance, in particular after softer-than-expected first quarter economic growth.

On Thursday, Statistics New Zealand said the economy only expanded 0.5 percent in the three months ended March 31 as building activity and investment shrank. Economists had been expecting growth of 0.7 percent while the central bank had been expecting the economy to expand 0.9 percent.

Economists at Citi said given the RBNZ was tipping much higher growth "the miss would provide governor Wheeler with more ammunition to keep the policy stance neutral at next week’s official cash rate announcement."

All 16 economists surveyed by Bloomberg expect no change in the official cash rate at next Thursday's review.

The gross domestic product data “supports our view that the RBNZ is likely to sit on its hands and keep the official cash rate unchanged at 1.75 percent for an extended period. We maintain our view that the RBNZ will not hike interest rates until late 2018,” said Kiwibank chief economist Zoe Wallis.

Capital Economists Australia and New Zealand economist Kate Hickie said 2018 “is still too hawkish” for the next rate hike. She doesn't expect the central bank to pull the rate hike trigger until there is a sustained pick-up in wage growth that filters through to core inflation and "with that unlikely to happen for some time yet, we don’t expect rates to begin to rise until early 2019."

The latest jobs data showed the unemployment rate fell to 4.9 percent in the three months ended March 31 from 5.2 percent in the December quarter but wage inflation remained muted, with the ordinary time private sector labour cost index increasing 0.4 percent in the quarter and growth in private sector wages the lowest since the June 2010 quarter.

In May, Wheeler kept the official cash rate at 1.75 percent, as expected, but surprised some in the market by affirming the bank's neutral bias with the benchmark rate unchanged until September 2019 when it rises to 1.9 percent.

ASB Bank chief economist Nick Tuffley said overall developments since the May announcement have been largely neutral for the inflation outlook and he still expects the bank to remain on hold until November 2018. While Fonterra Cooperative Group’s opening milk price for 2017/18 suggests the dairy sector will be in good stead next year and the recent 44-year high in the terms of trade will lift inflation pressures, soft economic growth is calling into question how quickly domestic capacity pressures are rising, he said.

Tuffley does, however, expect Wheeler to step up rhetoric about the New Zealand dollar with the trade-weighted index hovering around 78 again.

"The RBNZ is likely to reiterate that further depreciation in the NZD is needed to achieve balanced growth," he said. The New Zealand dollar is currently trading at 77.58 on a trade-weighted index, above the 76 average the central bank projects for the second quarter.

Meanwhile, Westpac Banking Corp acting chief economist Michael Gordon also expects the bank maintain a neutral outlook for interest rates but did signal the risk that next week’s statement could emphasise the equal likelihood of rate cuts or hikes, in particular after the weaker-than-expected GDP. “That could rattle financial markets, which are largely focusing on rate hike scenarios,” he said.

(BusinessDesk)

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