MNI 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

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