RBNZ leaves door open to further policy easing

RBNZ leaves door open to further policy easing, but next OCR move will be up

The RBNZ this morning left the official cash rate (OCR) unchanged at 2.5%, as expected. The accompanying commentary also offered few surprises, remaining dovish, with Governor Bollard reiterating that the OCR will remain “at or below” current levels until the end of 2010.

While the RBNZ will likely maintain its current dovish tone in the statements accompanying the upcoming October and December OCR announcements, we do expect that Bollard will shift away from the current easing bias in early 2010. The RBNZ said today that “until the risks and uncertainties about the outlook have acceptably reduced we anticipate keeping the OCR low.” By year-end, though, we believe the synchronized global economic recovery will be gathering steam, and the domestic economy would have begun to expand; thus, we maintain our forecast that the first OCR rate hike will be delivered in July next year.

On the global outlook, as indicated in the September Monetary Policy Statement (MPS) released today, the RBNZ now expects a faster recovery in New Zealand’s major trading partners (table). On the domestic front, though, Bollard remained reluctant to get excited about recent positive developments, such as the significant improvement in business confidence. Instead, he highlighted that business profits remain under pressure, which has negative implications for the investment and employment outlook. The Governor also suggested that the recent stabilization in retail spending that has emerged thanks to positive net immigration and an uptick in housing market activity will be short-lived. Any recovery in household spending will be limited by rising unemployment, softer wage growth, and the fact that consumers remain highly indebted.

The RBNZ maintained its forecast that a recovery will get underway in New Zealand toward year end. This is in line with our forecast which calls for positive GDP growth in 4Q09, following seven straight quarters of decline. The RBNZ said, though, that the forecast economic recovery is based on an easing in monetary conditions, which have tightened considerably thanks to NZD appreciation (chart). If monetary conditions fail to ease, the recovery forecast to get underway later this year will be “put at risk” and the RBNZ would need to “reassess policy settings.”

Indeed, stronger NZD is the main risk to an imminent recovery. NZD has gained more than 4% against USD since the last OCR decision, so it was no surprise that Bollard again today voiced his anxiety about continued NZD strength. The high currency is hampering a prospective export-led recovery and the much-needed rebalancing of growth away from debt-fuelled household spending, a rebalancing needed to promote a sustainable recovery. In recent months, the Governor has oft voiced his concerns that, amid signs that the prolonged downturn in the economy has bottomed, consumers may revert to their old “borrow to spend” habits; this, we believe is a key argument not to lower interest rates any further.

See… Full release with charts (PDF)

© Scoop Media