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


Fuels Rushing In: Govt "Ready To Act" On Petrol Market Report

The Government will now take the Commerce Commission’s recommendations to Cabinet...
• A more transparent wholesale pricing regime • Greater contractual freedoms and fairer terms • Introducing an enforceable industry code of conduct • Improve transparency of premium grade fuel pricing... More>>


Reserve Bank Capital Review Decision: Increased Bank Capital Requirements

Governor Adrian Orr said the decisions to increase capital requirements are about making the banking system safer for all New Zealanders, and will ensure bank owners have a meaningful stake in their businesses. More>>


Aerospace: Christchurch Plan To Be NZ's Testbed

Christchurch aims to be at the centre of New Zealand’s burgeoning aerospace sector by 2025, according to the city’s aerospace strategic plan. More>>


EPA: Spill Sees Abatement Notice Served For Tamarind Taranaki

The notice was issued after a “sheen” on the sea surface was reported to regulators on Thursday 21 November, approximately 400 metres from the FPSO Umuroa. A survey commissioned by Tamarind has subsequently detected damage to the flowline connecting the Umuroa to the Tui 2H well. More>>

Taskforce Report: Changes Recommended For Winter Grazing

A Taskforce has made 11 recommendations to improve animal welfare in intensive winter grazing farm systems, the Minister of Agriculture Damien O’Connor confirmed today. More>>