MNI INSIGHT: RBNZ Closer To Cut As Dovish Scenario Looms

By Sophia Rodrigues

     SYDNEY (MNI) - New Zealand may be moving closer to a rate cut after a

closely-watched business survey suggested growth could stumble, potentially

prompting the Reserve Bank to act unless the government steps in to boost

confidence.

     ANZ's monthly business survey on Thursday showed confidence slipping to

-50.3 in August from -44.9 in July, helping send the local dollar almost 0.9%

lower against the greenback by midday in London. It was the tenth straight

negative read and 50% of respondents expected general conditions to deteriorate

over the year ahead. Other metrics in the survey, of still more importance to

the RBNZ, were also disappointing. The outlook for activity failed to rise from

+3.8, compared to its long-term average of +27. Investment and employment

intentions both fell.

     --RISK OF DOVISH SCENARIO

     In its August Monetary Policy Statement, the RBNZ pushed back the timing of

its first increase in the overnight cash rate since 2014, saying that the

decline in GDP growth over the past year suggested economic momentum might be

easing. It also outlined a potential dovish scenario in which subdued business

confidence and housing market weakness keeps GDP growth below trend, leading to

four rate cuts, totalling 100 basis points, starting from Q3 of 2019.

     An alternative, hawkish scenario, was closer to the bank's central forecast

and, pointed to the possibility of two rate hikes in the first half of 2020 if

wage growth feeds through into higher inflation.

     Under a change to its mandate introduced by New Zealand's Labour-led

government, the central bank must now conduct monetary policy so that it

contributes to maximum sustainable employment. While the bank says current

employment levels are roughly at this maximum point, it expects a modest decline

in jobs, raising the risk that inflation will fail to advance to the mid-point

of its 1% to 3% target band.

     ANZ's survey showed investment intentions fell to -4.7 from +0.6,

suggesting 5% of businesses plan to reduce investment. It is rare for this

measure, identified along with firms' own activity as one of the two best survey

indicators by RBNZ Governor Adrian Orr at the media conference after the August

policy statement, to drop into negative territory. The bank had taken the

decline in both over recent months into account, he said.

     Employment intentions also fell below zero, to -5.5 in August from +1.5,

suggesting weaker jobs growth over coming months.

     --CONFIDENCE DECLINE AMID POLITICAL UNCERTAINTY

     Business confidence began falling before elections in September 2017, but

its descent has continued amid uncertainty over key policies since the coalition

took office. The outlook for activity slid to 3.8 from 22.2 last October.

     The RBNZ does not comment on politics but watches it closely and is perhaps

hoping that the government steps in to encourage optimism among businesses.

     Earlier this week, Prime Minister Jacinda Ardern announced the formation of

a Business Advisory Council to assist with the development of economic policies.

     "The Council will provide a forum for business leaders to advise me and the

government and to join us in taking the lead on some of the important areas of

reform the government is undertaking," Ardern said.

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

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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