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


Inflationary govt policies could catch market off guard

Inflationary government policies could catch market off guard if RBNZ turns hawkish

By Rebecca Howard

Oct. 27 (BusinessDesk) - New Zealand's interest rate swaps have barely budged since the new government was announced despite the risk that its policies could stoke inflation, provoking a rate-hike response from the Reserve Bank.

The new government, led by Labour leader Jacinda Ardern, has provided a broad outline of a change in economic direction and while the market is waiting for the details, policies such as increasing minimum wage, a regional petrol tax for Auckland, easier fiscal policy and generally a higher cost of doing business will create inflationary pressure, said Bank of New Zealand currency market strategist Jason Wong.

The kiwi dollar has tumbled 3.5 percent on a trade-weighted index basis since Winston Peters announced he was joining forces with Labour late last week, making imports more expensive and potentially reigniting tradables inflation. Importantly it is also 7.4 percent lower than where the central bank expected it to be in the September quarter.

Markets, however, are overlooking this, and even pushing out expectations for rate hikes as they focus on government changes being negative for growth. Wong said markets are also assuming that proposed changes to the Reserve Bank Act mean the bank "will sit back and tolerate higher inflation outcomes," something he said is "misjudged" because such changes could be some time away.

Market pricing is now pointing to the first hike in February 2019 versus a prior view of November 2018. The two-year swap rate has only moved 3 basis points higher since the new government was announced while the 10-year swap is up five basis points.The Reserve Bank has repeatedly said rates will stay on hold until September 2019.

Others agree the market's view may be short-sighted, in particular as the central bank's global peers - such as the European Central Bank and the US Federal Reserve - look to rein in stimulus.

"Compared with the August MPS projections, planned government spending has jumped through the roof and the kiwi has fallen through the floor. If they (the RBNZ) don't lift the cash rate profile on that combination, I'll be very surprised. And the markets are so unprepared for that," said Annette Beacher, head of economic analysis in Asia for TD Securities.

Ross Weston, a senior trader at Kiwibank, said the lack of movement in swap rates is "foolish" given the central bank is facing a tough monetary policy review in November, when it also has to provide forecasts.

He said the market's focus on slower growth is the "wrong angle" and "eventually the market will turn to focus on the inflationary elements of the elections."

Weston noted that inflation is already higher than the central bank forecast at 1.9 percent in the September quarter. The RBNZ had expected annual inflation of 1.6 percent in the third quarter. "They'll need to adjust inflation higher, which all spells bringing forward rate increases," he said. If the central bank deems the slide in the TWI to be sustained, the forward CPI forecasts may need to "rise a fair bit," he said.

BNZ's Wong also said the risks around the inflation outlook might well be noted by the RBNZ in the November review "and this could potentially catch the market off guard."

The Reserve Bank is due to publish its next monetary policy statement, including its forecasts on Nov. 9


© Scoop Media

Business Headlines | Sci-Tech Headlines


Department Of Conservation: Beech Mast On The Cards After Warm Summer

Climate modelling shows this year’s hot March has increased the chance of beech forest seeding next summer in parts of New Zealand, which could be bad news for native wildlife. The Department of Conservation (DOC) uses data from NIWA’s virtual climate ... More>>

Government: Delivering Lower Card Fees To Business

Commerce and Consumer Affairs Minister David Clark has today announced the Government’s next steps to reduce merchant service fees, that banks charge businesses when customers use a credit or debit card to pay, which is estimated to save New Zealand businesses ... More>>

SEEK NZ Employment Report: April 2021

OVERVIEW OF APRIL 2021: STATE OF THE NATION: April, for the second consecutive month, saw the highest number of jobs ever advertised on Applications per job ad fell 9% month-on-month (m/m). SEEK job ads were up by 12% m/m. SEEK job ads were ... More>>

Geo40: Global Plans To Recover Low-Carbon Lithium At Scale Accelerated By Investment Of Up To $7.5m By Pacific Channel

New Zealand’s leading sustainable, mineral-recovery company, Geo40 Limited has secured up to $7.5m in equity investment from New Zealand deep-tech specialist Venture Capital firm Pacific Channel to fast-track plans to develop its nascent lithium-from-geothermal-fluid ... More>>

Stats: Lower Job Security Linked To Lower Life Satisfaction

People who feel their employment is insecure are more likely than other employed people to rate their overall life satisfaction poorly, Stats NZ said today. New survey data from the March 2021 quarter shows that 26 percent of employed people who thought ... More>>

The Conversation: The Outlook For Coral Reefs Remains Grim Unless We Cut Emissions Fast — New Research

A study of 183 coral reefs worldwide quantified the impacts of ocean warming and acidification on reef growth rates. Even under the lowest emissions scenarios, the future of reefs is not bright. More>>