Global Markets Data Flash (New Zealand) MPS August - Instant View The RBNZ issued a surprisingly dovish statement, based on a relatively soft GDP track (see above).

Lack of capacity pressure implies that there will be little second-round effects from the forthcoming inflation spike.

Despite the weak NZD, the cash rate is now assumed to rise to only 7% during this cycle, with a 25 bps December tightening implied by the RBNZ projections.

While it is good that the Bank is giving the economy the benefit of the doubt at this point, we believe that they underestimate the medium-term growth stimulus arising from the weak NZD. Furthermore, the TWI is already trading around 2% below the Bank's assumption for H2/00.

As a result, we forecast the inflation spike to be higher than the RBNZ 2.7% - more like 3.1%. Moreover, inflation is likely to stay above 2.5% for longer, creating second-round effects and problems for monetary policy.

Consistent with that outlook, we expect the Bank to shift its view again in the next Monetary Policy Statement in December. The market is likely to increasingly reflect a more hawkish view again over coming months. The chances of an October tightening are now slim.

Ulf Schoefisch, Chief Economist, (64) 9 351 1376

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