Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

RBNZ Remains On Hold

Key points
 As widely expected, the RBNZ left the official cash rate (OCR) unchanged at 5.75% when it released its quarterly Monetary Policy Statement.
 Governor Brash described the current level of the OCR as ‘around neutral’.
 The market perceived the Statement as relatively hawkish, with the RBNZ focusing on the strength of the domestic economy and upside inflation risks.
 The Bank’s central forecast scenario includes a modest first re-tightening in early 2002.
 However, the door for a further easing in the near term was left open, with the RBNZ pointing to the risk of trading partner growth continuing to disappoint.
 An alternative scenario printed in the document showed the global output gap around 0.5ppt wider than in the central scenario, which would be consistent with the OCR dropping 75bps below the central track. That would imply possible further easing steps later this year and/or in early 2002.
 The projected growth profile from here on has remained largely unchanged: 2½% in 2001/02, followed by 3% and 2½% respectively during the two subsequent years.
 The RBNZ lowered its assumption for annual growth of potential output to 2½% and assessed that the economy is currently operating at around full capacity. The Bank estimates that, following flat March quarter GDP, the economy rebounded by 0.8/0.9% qoq in Q2.
 Consistent with buoyant domestic trading conditions, the RBNZ has revised up its 12 month inflation outlook by a small amount (see chart below), but expects medium-term conditions to allow CPI inflation to fall back to the mid-point of the 0-3% target range.
 The Bank points out, however, that there are upside inflation risks arising from tight capacity utilisation, particularly in the labour market.
 The assumption for wage inflation has been revised up by 0.5% for each of the next three years (to 4%, 3½% and 3% respectively).
 Fixed interest markets sold off following the statement. Bill futures weakened around 10 points, while bond yields rose around 6 bps. The market is only pricing a 15% chance of a further easing this year.
 The NZD did not react to the statement.


Our assessment
The RBNZ’s statement clearly reflected the divergent risks surrounding the central forecast scenario:
 On the one hand, domestic inflation risks are considerable – particularly arising from the tight labour market - and the Bank admitted in its write-up that its inflation projection could be seen as ‘unduly optimistic’.
 On the other hand, the Bank again demonstrated its concern about the global growth outlook and the potential effect on New Zealand, notwithstanding currently buoyant domestic trading conditions.
The alternative scenario printed in the Statement shows that it would not take a lot of additional weakness in global growth to generate conditions, which, according to the RBNZ, would justify a further reduction in the OCR. Given the latter, it is surprising that the market is pricing only a 15% chance of further easing steps later this year.
While the market has perceived today’s Monetary Policy Statement to be relatively hawkish, we are of the view that the RBNZ has retained an easing bias for the near term. General uncertainty about the global outlook suggests that it would not take very much to convince the market to revert to pricing higher probabilities of further rate cuts. For instance, a string of weak US data or an unexpectedly ‘dovish’ statement by the Fed next week could be the trigger. Furthermore, another downward revision to trading partner growth projections (latest Consensus forecasts will be released later this week) could move conditions significantly towards the RBNZ’s alternative scenario.
While Deutsche Bank’s central view remains that the RBNZ’s easing cycle is finished and that a first re-tightening is likely to occur in March, the risk remains that yields will go lower in the near term.


Ulf Schoefisch, Chief Economist, New Zealand

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

Paymark: Lockdown Equals Slowdown For Some

The three days of lockdown for Auckland earlier this month made a clear impression on our retail spending figures. While only Auckland moved into Level 3 lockdown, the impact was felt across the country, albeit at different levels. Looking at the ... More>>

Infrastructure Commission: Te Waihanga Releases Report On Water Infrastructure

The New Zealand Infrastructure Commission, Te Waihanga’s latest discussion document highlights the importance of current reforms in the water sector. Its State of Play discussion document about water infrastructure is one of a series looking at the ... More>>

Sci-Tech: Perseverance Rover Lands On Mars – Expert Reaction

NASA has landed a car-sized rover on the red planet to search for signs of past life. The vehicle has more instruments than the four rovers preceding it, and it’s also carrying gear that could help pave the way for human exploration of Mars. The ... More>>

ALSO:


ASB: Quarterly Economic Forecast Predicts OCR Hike As Early As August 2022

Predictions of interest rate rises have been brought forward 12 months in ASB’s latest Quarterly Economic Forecast. Chief Economist Nick Tuffley now expects the RBNZ to begin raising the OCR from its current level of 0.25% as early as August ... More>>

ACT: Matariki Almost A Half Billion Dollar Tax On Business

“Official advice to the Government says an extra public holiday at Matariki could cost almost $450 million,” ACT Leader David Seymour can reveal. “This is a perfect example of the Prime Minister doing what’s popular versus what’s responsible. ... More>>

Genesis: Assessing 6,000 GWh Of Renewable Generation Options For Development By 2025

Genesis is assessing 6,000 GWh of renewable generation options for development after starting a closed RFP process with 11 partners. Those invited to participate offer a range of technologies as Genesis continues to execute its Future-gen strategy to ... More>>

OECD: Unemployment Rate Stable At 6.9% In December 2020, 1.7 Percentage Points Higher Than In February 2020

The OECD area unemployment rate was stable at 6.9% in December 2020, remaining 1.7 percentage points above the level observed in February 2020, before the COVID-19 pandemic hit the labour market. [1] In December, the unemployment rate was also stable ... More>>

Stats NZ: Unemployment Drops To 4.9 Percent As Employment Picks Up

The seasonally adjusted unemployment rate dropped to 4.9 percent in the December 2020 quarter, from 5.3 percent in the September 2020 quarter, Stats NZ said today. Last quarter’s unemployment rate of 5.3 percent followed the largest increase observed ... More>>