MNI INTERVIEW: RBNZ McDermott: Fiscal Plan Offsets Dnside Risk

--RBNZ McDermott: OCR Track Likely Lowered If Not for Fiscal Package

--McDermott: RBNZ Could Respond With OCR Cut, Intervention if NZD Stays High

--RBNZ McDermott: Monetary Policy Neutral; Equal Chance of Cut, Hike

--RBNZ McDermott: Budget Family Package Was Major Development, Mkt Misstepped

By Sophia Rodrigues

     SYDNEY (MNI) - The recent downside risks to the official cash rate forecast

from lower growth and inflation have been offset by fiscal stimulus and so the

Reserve Bank of New Zealand didn't need to the lower its official cash rate

track, Assistant Governor John McDermott said.

     "We fully recognized the downside risks," McDermott said in an exclusive

interview with Market News International last Friday. "The fiscal package offset

most negatives and therefore we didn't lower the OCR track."

     In the quarterly Monetary Policy Statement published last Thursday, the

RBNZ left the OCR unchanged at 1.75% as widely expected but surprised some by

leaving the OCR forecast unchanged towards the end of the projection period. The

RBNZ left intact the 1.9% OCR forecast for September 2019, changing to 2.0% in

March 2020, thus continuing to signal it doesn't expect first OCR hike until

late 2019.

     Lower-than-expected GDP and consumer price inflation in the first quarter,

coupled with a fall in construction activity and a rise in the exchange rate,

meant that downside risks to the economy had increased since the May statement.

     McDermott admitted that were it not for the fiscal stimulus from the 2017

budget, there was a risk the RBNZ would have had to lower its OCR projection.

     But increased fiscal spending on families announced in the budget was a

major development and will have a significant impact on household consumption,

McDermott said, adding he was surprised that it wasn't more widely discussed.

     "The lack of discussion ... misstepped the market," he said.

     The government's budget 2017 announced on May 25 contained measures mainly

aimed at helping lower-income families and improving incomes for those with high

housing costs. The measures included raising the income thresholds for the

lowest and middle-income income tax brackets, increasing family tax credits,

offering accommodation supplementary payments for certain households and higher

accommodation benefits for students.

     This was in addition to an increase in infrastructure spending, which is

expected to create more jobs in the economy.

     The positive effect of this fiscal stimulus means the RBNZ's monetary

policy stance currently remains neutral, with equal chance of rate hike and cut,

McDermott said.

     The even odds are "absolutely still valid but the plan is to keep the OCR

on hold for an extended period," McDermott said.

     One downside risk that could bring a cut in the OCR could be a continued

elevated exchange rate if it were seen to have a significant impact on growth

and inflation, and is judged a better response than intervention in the

foreign-exchange market.

     "Intervention is a tool that's available; it's not gone away," McDermott

said. Intervention versus an OCR cut are not interchangeable options, he said

when asked if the RBNZ could consider one of them before the other.

     "As usual, we will sit with the framework to see what's going on and what

we could credibly do," he said.

     Given the upgrade to consumption forecasts, the key risk for the RBNZ's

OCR, other things being equal, is likely to be any slowing in household

consumption and not the two scenarios presented in the MPS.

     "We still believe that they are not the most likely ones," McDermott said,

referring to the first scenario where global inflationary pressures increase

more rapidly than expected necessitating faster-than-expected OCR hikes, and the

second, where both weaker consumption growth and dwelling construction lead to

lower domestic capacity pressure and require a lower OCR.

     One comforting factor for the RBNZ has been the stability in funding costs

for banks, due mainly to the fall in foreign wholesale funding rates. Consistent

with the stability in marginal funding costs, mortgage interest rates have

remained broadly flat in recent months, the RBNZ said in the MPS.

     The RBNZ recognizes the risk that any increase in banks' funding costs

would result in an increase in mortgage rates and has already factored in some

rise in its forecast, McDermott said.

     Another risk for household consumption is the possibility of a significant

fall in housing prices. In the MPS, the RBNZ noted the slowing in the housing

market since mid-2016, mainly in Auckland, where house prices are now below the

level of a year earlier.

     The RBNZ would be concerned only if there is a widespread fall in housing

prices. A 5% fall in nationwide house prices, for example, would cause some

worry, though for now, the RBNZ is watchful for any renewed surge in house

prices when the spring season starts and following the general elections in

September.

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

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