MNI INSIGHT: New Zealand Budget Downnside Risk for RBNZ MonPol

--Govt. Trim Of Near-Term Growth Could Tip RBNZ From Neutral To Dovish

By Sophia Rodrigues

     LONDON (MNI) - A downgrade in the near-term economic growth profile within

the New Zealand government's budget issued today has increased the downside risk

to the country's central bank monetary policy, MNI understands.

     This could tip the balance towards further easing in the official cash

rate, given the Reserve Bank of New Zealand stated in its rate decision on May

10 that "the direction of our next move is equally balanced, up or down. Only

time and events will tell."

     Earlier Thursday, New Zealand's Labour government published its first

budget after it came into power late last year. There were few surprises in the

budget, with the government keeping its promise to be fiscally responsible.

     However, there was a downgrade to the near-term growth profile compared

with the Half Year Economic and Fiscal Update (HYEFU) published in December.

     The government is now projecting GDP growth of 2.8% in 2018 compared with

2.9% in the HYEFU, and 3.3% growth in 2019 versus 3.6% forecast earlier. While

it also upgraded the forecasts for each of the following three years, it is the

nearer-term forecasts that are relevant for the RBNZ's monetary policy horizon.

     Significantly, the budget made changes to the government's housing program

(known as Kiwibuild) and the roll out is now expected to occur later that

previously forecast. Around half (NZ$2.5 billion) of additional nominal

residential investment will now occur in the forecast period up to 2022 compared

with the NZ$5 billion projected before, with the balance now expected to occur

outside the forecast period.

     --POTENTIAL SLIPS

     The downgrade in the government's near-term growth forecasts has

implications for the RBNZ's monetary policy because it is based on the

assumption that fiscal policy would help GDP to rise above potential.

     Indeed, in its May Monetary Policy Statement, the RBNZ said that along with

improving global conditions and low interest rates, fiscal policy is expected to

help lift GDP expansion to above potential. "In addition to KiwiBuild, higher

government spending and increases in government transfers and allowances are

expected to support demand," the RBNZ said, adding the assumptions were based on

the information in the HYEFU.

     Specifically, the RBNZ said that it expects supply constraints to continue

to bind residential investment in 2018 but, from 2019 onwards, the KiwiBuild

programme would help to compensate by boosting growth in residential investment.

     Interestingly, the RBNZ's forecast for growth to rise above trend is based

on investment growth accelerating in 2019 and 2021, partly driven by KiwiBuild,

and it judged the risk to this as balanced. This risk has now emerged as a clear

downside one.

     The RBNZ's projection for inflation to rise towards the mid-point of the

target band in 2020 is based on the output gap reaching 0.9% of potential output

by 2021. The RBNZ cited downsides risks to this in its May statement, and an MNI

Insight article published on May 10 said that even though the number of downside

risks cited by the central bank were less than those to the upside, the

likelihood that those to the downside would materialise were individually

greater than those to the upside.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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