More reasons to think OCR has bottomed

FIRST TAKE: New Zealand's NBNZ business confidence survey - more reason to think OCR has bottomed

The NBNZ business confidence survey improved again in July, remaining in positive territory for the third straight month. A net 18.7% of respondents expect business conditions to improve in the coming year - still a small portion of those surveyed, but encouraging given that confidence is key to the prospective recovery becoming self-fulfilling.

Firms’own activity expectations jumped considerably, signalling that any contraction in 3Q GDP growth will be mild and growth in 4Q will turn positive for the first time in eight quarters (see chart). The reading of firms’ own activity expectations rose to +12.6 (from +8.3).

The increase in the confidence indicators, combined with other signs of improving global economic conditions, stabilization in the domestic housing market, and a strong turnaround in net migration, reaffirm our view that the RBNZ's job in this easing cycle is done.

We expect no change to the OCR tomorrow, but the commentary accompanying the decision is key. Governor Bollard probably will cite the positive developments acknowledged above as reasons to leave the cash rate unchanged this month. He will, though, flag continued NZD strength as a key risk to New Zealand’s economic outlook.

The RBNZ tomorrow will leave the door open to further policy easing. But, In the absence of an unexpected and abrupt deterioration in the economic outlook, both domestic and abroad, J.P. Morgan believes the next move in the OCR will be up. Our forecast calls for rate hikes from mid-2010.

More detailed analysis to follow.

ENDS

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