MNI ANALYSIS: Downside Risk to RBNZ Policy from NZ Election

--Risk of Migration Decline Key Risk to RBNZ Policy

By Sophia Rodrigues

     SYDNEY (MNI) - New Zealand's general election delivered no clear outcome

and irrespective of which party manages to form the government, the risk for

monetary policy is likely to grow from a greater-than-expected slowdown in net

immigration.  

     The slower growth that could result could mean the Reserve Bank of New

Zealand's official cash rate would stay at the 1.75% rate for longer, with a

real risk that it may have to be cut further.

     The general election held on September 23 resulted in the ruling National

Party gaining the most votes but not enough to form a government. 

     There are still around 380,000 votes to be counted and this is expected to

be completed by October 7, with very little chance of clarity before October on

which parties will form the next government.

     Current Prime Minister Bill English's National Party won 58 seats,

according to results so far, and this total could go down to 56 once the

remaining votes are counted. But 61 seats are needed to form a government. 

     The Labour Party headed by Jacinda Ardern has a combined 52 seats with the

support of Green Party of Aotearoa New Zealand and so will need another 9 seats

to govern.

     Both the main political parties thus need the support of the New Zealand

First party, which holds the balance of power with nine seats currently. Both

National and Labour have indicated their intention to form a coalition with NZ

First. 

     NZ First's key policy position calls for tightening immigration, with party

leader Winston Peters having stated in the past that he would like net

immigration to slow to 10,000 per year from around 70,000 currently.

     Labour's policy is to slow it to around 20,000-30,000, making a sharp fall

in net immigration a key risk if Labour comes to power with the support of

Greens and NZ First.

     If National forms a government with the support of NZ First, it also

increases the risk of a slowing in immigration given Peters is likely to demand

a cut in exchange for his support.

     RBNZ Governor Graeme Wheeler, who steps down on Tuesday, said in his final

speech on August 30 that migration and the housing market are the two key

domestic risks for the economy.

     "Our forecasts assume net immigration of 140,000 people over the next three

years - a further 3.5% boost to the working age population. A much sharper

reduction in arrivals or increase in departures, absent an increase in global

growth, would slow domestic economic growth by reducing employment and demand

growth," Wheeler said.

     Since early 2012, New Zealand has gotten a boost from 220,000 net

immigrants, who have had a positive effect on demand even though the overall

impact has been weaker than in past migration cycles.

     The risk of a resurgence in house price inflation -- the second risk cited

by Wheeler -- is slightly higher if National forms the government but no one

expects the kind of rebound that would become a worry for the RBNZ.

     Labour has raised the possibility of capital gains tax on housing, other

than owner-occupied homes, and lower-income housing, which could lead to further

slowing in house price inflation.

     But if National comes to power, the housing market, and so prices, could

get support from its first home buyers grant. But any sharp resurgence is

unlikely given other headwinds like slowing net immigration and the RBNZ's

existing macro-prudential measures. 

     In addition, NZ First's Peters supports tougher rules on overseas entities

buying New Zealand land and businesses, which, if enacted, would be another

limitation for housing price growth.

     There may be a small impact from less fiscal stimulus in the near term if

Labour comes to power, though in the longer run fiscal policy is expected to be

looser under Labour.

     There are direct risks to the RBNZ and the New Zealand dollar, too, with

Peters likely to play a key role in any government. Peters has been quoted in

the past as saying that the New Zealand dollar is overvalued and he would like

the RBNZ to shift to a Singaporean model, where currency intervention is used as

the tool to target price inflation.

     But the risks to the RBNZ, at least on paper, will be greater if Labour

forms a government because they want to move the central bank from the single

decision-maker model (the governor) to a committee structure with external

members likely to form part of the decision-making body. In practice, it's

unclear how this would make any difference to how the monetary policy stance is

determined, given the governor currently makes his decision after consultation

and advice from an internal committee.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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