INTERVIEW: Stimulus Spurring Economic Pickup: RBNZ's Hawkesby

By Lachlan Colquhoun

     SYDNEY(MNI) - The New Zealand economy is set for a strong finish to 2020

with "encouraging signs" of the positive impact of stimulatory monetary policy,

Christian Hawkesby, Assistant Governor of the Reserve Bank of NZ, told MNI.

     In an interview on Monday, Hawkesby said the central bank was forecasting a

pickup in the domestic economy in 2020 thanks to a combination of monetary

policy and fiscal measures.

     "There are positive signs that monetary policy still does work and is

transmitted through many channels, and we are starting to see some evidence of

that stimulus working its way through," said Hawkesby.

     The RBNZ moved to an easing bias in March and has cut the Official Cash

Rate (OCR) twice this year to a record low of 1.0%. In August, it took investors

by surprise with a second cut, by 50 basis points, in what it described as a

"pre-emptive" move to revive the economy.

     Hawkesby pointed to recent data, such as improved business confidence,

employment and house prices, as signs of positive momentum. He also welcomed a

NZ$12 billion four-year infrastructure plan announced by the government this

week, which comes on top of measures announced in the budget.

     Business confidence, which began the year in the doldrums, rebounded to its

highest level since October 2017 as measured by the closely-watched ANZ Bank

survey.

     GDP data to be released on Thursday is expected to be stronger than the

RBNZ's estimate of 0.3%. Commercial bank economists are forecasting a figure

between 0.5% and 0.7%, which would deliver annualised growth of between 2.3% and

2.5%.

     --STIMULUS EFFECT ON RBNZ PROJECTIONS

     With the economy gaining momentum, and agriculture exports forecast to rise

to a record NZ$47.9 billion next year, market watchers now expect the RBNZ to

hold interest rates steady for the first part of 2020.

     "We are working the practicalities of how the stimulus measure, and the

fiscal policy measures announced more recently, will influence our projections,"

Hawkesby said.

     "We've also observed in recent months there are strong signs from the

labour market, and that is also a key part of the story."

     House prices, which have increased by 8.6% on a national basis over the

last year, are also playing into the stimulus story, although Hawkesby said that

the Bank was aware of the risks of too much house price inflation.

     "This is one of the channels through which the lower rates work through the

economy and feed into economy activity and ultimately into consumer price

inflation," he said.

     The RBNZ, which also has the responsibilities of a prudential regulator,

earlier this month announced the results of its capital review of the major

banks, including stiff increases in minimum capital requirements.

     Under the measures, the largest - Australian-owned - banks, will be

required to lift their Tier 1 capital ratios to 16% of risk-weighted assets,

equivalent to an extra NZ$20 billion in NZ. They will be given seven years,

rather than the initially-announced five years, to achieve this.

     Hawkesby said the central bank estimated this would lift funding costs by

20 basis points over the seven years.

     "That is a very long term assumption on how those funding costs will adjust

and how they will wash through until we arrive at the 'new world' in seven

years," he said.

     "Factoring that into our thinking in the early part of 2020 is a very

different exercise on estimating the impact on official interest rates straight

away."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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