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Free AccessMNI ANALYSIS: RBNZ Set to Stay Neutral But More Tilt to Ease
--RBNZ OCR Track May Show 1.8% Through Entire Period
By Sophia Rodrigues
SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to once again
maintain its outlook for monetary policy but may signal that downside risks to
the official cash rate (OCR) have increased which would make the overall policy
more dovish versus May.
Any such dovishness would likely come from the way the RBNZ characterizes
the balance of risks. There is also a possibility the RBNZ lowers the OCR track
from 1.9% in late 2019 and 2.0% in early 2020, thus keeping it at 1.8% through
the entire projection period. That should be a hint on how the downside risks
have changed.
The RBNZ's OCR decision is due Thursday at 0900 local time, and both
economists and the market are unanimous in their view that the OCR will be left
unchanged at 1.75% for the fifth straight meeting. The RBNZ will also publish
its quarterly Monetary Policy Statement, which will contain updated forecasts
and commentary on the economy
The money market is currently pricing in a 56% chance of a 25 bps OCR hike
by June 2018 and a near-100% chance of a hike by September 2018, with an 80%
chance of two hikes by February 2019. Most economists are forecasting at least
one hike in 2018.
Like the last MPS in May and the OCR statement in late June, the RBNZ is
likely to maintain the last line; "Monetary policy will remain accommodative for
a considerable period. Numerous uncertainties remain and policy may need to
adjust accordingly."
But there may be tweaks in its language, with the commentary on inflation
the most important one to look for. Any commentary on the exchange rate will
also be important, especially if the RBNZ makes additional comment about its
impact on inflation.
New Zealand economic data have mostly disappointed in recent months and
leading that pack is second quarter consumer index inflation data. The data
showed headline consumer inflation was flat q/q in Q2 and +1.7% y/y, slowing
from +2.2% y/y in Q1. The outcome was below MNI median consensus of +0.2% q/q
and +1.9% y/y and also below the RBNZ's projection for +0.3% q/q and +2.1% y/y.
The RBNZ is likely to view the fall in headline inflation below the
mid-point of its target band as a concern especially given the risk that the
appreciation in the exchange rate could put further downward pressure on
inflation in coming quarters, and the relationship between headline inflation
and wage growth.
The slowing in inflation contributed to the RBNZ's preferred sector factor
model decelerating to 1.4% q/q in Q2, after remaining unchanged at 1.5% for six
quarters in a row. There was also a small drop in inflation expectations in the
latest survey published by the central bank earlier this week.
Another key disappointment was a fall in construction activity in Q2, due
to a sharp fall in non-residential construction and a small fall in dwelling
construction. Offsetting this would be support to growth from the government
budget announced in May.
Still, the RBNZ's latest commentary is likely to suggest the upside risk to
inflation from higher capacity pressure due mainly to higher construction may
have faded, whereas the downside risk may have increased because residential
investment isn't likely to grow as strongly as expected in May.
Some downside risk to the OCR also comes from the fall in the neutral rate
as that makes current monetary policy less stimulatory compared with previous
estimates. In a speech last month, RBNZ Assistant Governor John McDermott said
the neutral nominal OCR is currently estimated to be around 3.5%. This is at
least 80 basis points lower than the RBNZ's estimate of a 4.3% neutral rate in
2015.
McDermott said the overall impact on the outlook for interest rates over
the RBNZ's projection horizon from this particular update on neutral rate will
be modest.
Also, to look for in the policy statement is any change on its view on
non-tradable inflation, especially given subdued wage growth.
In May, the RBNZ said the "current stance of monetary policy supports
strong GDP growth, such that non-tradables inflation gradually increases and
headline inflation settles around the target midpoint over the medium term."
But a paper published by Philip Turner,a former Deputy Head of the Monetary
and Economic Department and a member of Senior Management of the Bank for
International Settlements, who reviewed the RBNZ's forecasting process
questioned why the RBNZ forecast non-tradable inflation to rise while labor
costs were not.
It is likely the RBNZ has made a more detailed study of this relationship,
which could result in a subdued view on non-tradable inflation.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$,MX$$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.