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Free AccessMNI INSIGHT: RBNZ Sees Downside Econ Risks But Hopeful on NZD
By Sophia Rodrigues
SYDNEY (MNI) - The Reserve Bank of New Zealand made careful tweaks to its
official cash rate statement Thursday to point out downside risks for the
economy given the dataflow in the last few weeks, MNI understands.
The RBNZ also tweaked its language on the New Zealand dollar and is hopeful
the exchange rate's recent fall will be sustained, MNI also understands.
Key among the downside risks is the weaker construction activity seen in
second quarter GDP as well as a softer outlook for the building sector. There is
also a worry that population growth in future may be weaker than expected.
For now, the overall story for the economy hasn't changed much and the RBNZ
prefers to wait until the November 9 Monetary Policy Statement to update their
outlook and expand on any change in their thinking.
Strong construction activity and high population growth are both key to the
RBNZ's growth and inflation outlook, and any downward revision to either, let
alone to both, would likely lead to downgrade in the forecast.
Some positive offset could come from the exchange rate, which is currently
weaker than the RBNZ's projection. If the kiwi's weakness continues, it could
lead to a slightly higher inflation forecast.
The RBNZ is hoping the dollar's weakness will be sustained and so it
moderated slightly the language on the exchange rate in Thursday's statement.
The RBNZ said a lower New Zealand dollar "would help" to increase tradables
inflation and deliver more balanced growth, compared to the stronger language in
the previous statement in August that a lower New Zealand dollar "is needed" to
boost prices.
Strong population growth is also a key element of the RBNZ's growth
forecast, finding several mentions in the detailed Monetary Policy Statements in
both May and August this year.
"Economic activity continues to be supported by accommodative monetary
policy and strong population growth. The outlook for domestic demand is also
supported by additional fiscal stimulus and the high terms of trade," the RBNZ
said in August.
While strong population growth could also pose a downside risk for the
economy if it leads to a resurgence in house price inflation, that risk may be
contained by affordability constraints, tightening in lending standards this
year and the RBNZ's macro-prudential measures, whose impact in slowing the
housing market could last for longer.
But the impact on consumption demand from any slowing in population growth,
combined with any further weakening in construction activity, could have
implications for the RBNZ's monetary policy as it would mean domestic capacity
pressure would be lower than projected.
If consumption and residential investment remain subdued relative to the
RBNZ's central projection, it may generate a more gradual rise in capacity
pressure and non-tradables inflation, the RBNZ said in August.
"Without an appropriate monetary policy response, headline inflation would
settle below the target midpoint over the medium term. To ensure CPI (consumer
price index) inflation evolves in line with the Bank's mandate,
more-accommodative monetary policy would be required. In this scenario, the OCR
would need to be lowered by around 75 basis points by 2019, and remain below the
central projection over the forecast horizon," the RBNZ said in its August
statement.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$,MX$$$$]
To read the full story
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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.