RBNZ Observer Update

PRESS RELEASE

15 May 2012
For immediate release

RBNZ Observer Update

Rates lower for longer, in an elevated NZD world

- Despite depreciating recently, the NZD remains historically high and continues to frustrate the RBNZ

- While commodity prices are now off their peaks, the NZD has not fallen in line with this, which is dampening incomes

- A strong currency is just another in a string of challenges that have hampered New Zealand’s recovery

The RBNZ to sit still for the rest of 2012
New Zealand has been struggling to recover from the 2008 global financial crisis four years ago. Recovery in New Zealand has been held back by the same household deleveraging forces afflicting the rest of the developed world. But in addition, New Zealand has had to contend with natural disasters. The damage done to the economy from the Canterbury earthquakes was significant. Estimates suggest the repair bill will be in the order of 10-15% of GDP.

The rebuild of Canterbury has been the big story in the our forecast horizon, but delays due to coordination and insurance issues, and aftershocks, have meant this has taken far longer to get started than expected.

There are now some early signs that the Canterbury reconstruction is getting underway, but the pick up so far has not been enough to push down the unemployment rate.

The next big challenge is the NZD. It has been stubbornly high by historical standards, despite the tepid performance of the local economy. This is acting as a brake on the local activity, dampening rural incomes, given rural commodity prices have weakened recently and is helping to contain inflation. The RBNZ has repeatedly expressed significant concern about the high NZD in recent months with further concerns noted in their recent financial stability review.

Given the high NZD and re-emerging concerns about the European Sovereign debt situation, we now expect the RBNZ to hold rates at 2.50% for the remainder of 2012. Though unlike current market pricing, we continue to expect the next move to be up, not down with the first increase expected in Q1 2013. With the cash rate already at historically low levels we think the RBNZ would be reluctant to cut further unless there is another negative global financial shock, which while possible, is not part of our central expectation for rates. On domestic grounds alone we think they are more likely to hold than cut, given the already very low level of the cash rate.

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