MNI: RBNZ Focuses on Labour, Dovish Shift Likely - Ex-staffers

Weak employment figures next week would prompt the Reserve Bank of New Zealand to consider a pause or else signal an approaching peak in its monetary tightening after its May 24 meeting, amid fears a recession may already be underway as the lagged effect of previous hikes hits mortgage borrowers, former staffers told MNI.

The Monetary Policy Statement released after the meeting, which already toned down its earlier hawkishness in April, could shift to a still more neutral stance in May, said Geoff Mortlock, international financial consultant and former financial stability adviser at the central bank. He expected a further 25bp hike in line with rates market pricing, though other former staffers said a pause was possible.

“The previous tone of earlier monetary policy statements has been … fairly aggressive, clearly wanting to knock back inflation expectations and has not put the same weight on the potential vulnerability in the household sector,” said Mortlock.

“We're looking at a very large proportion of mortgages on fixed rates coming on to higher interest rates. That is going to put a good 20% of the household sector in fairly severe stress. That must be a sobering fact for the RBNZ to weigh into the tone of their report.”

FOOD INFLATION

A key determinant going into the meeting will be March quarter labour statistics, to be published by Stats NZ on May 2. The last December quarter jobs print showed unemployment at 3.4%.

“The labour market is still very tight so wage pressure is building," Mortlock noted. "But immigration has increased sharply over the last four months. That could give some relief if it continues. There are certainly signs the economy – if not already – is in recession, or getting that way pretty quickly."

In addition to labour market data, the RBNZ will also closely consider food and non-tradable inflation, published on May 10. Two-year inflation expectations follow on May 12.

“The Bank must be getting close to its projected peak,” Mortlock said. “Inflation pressure looks to be easing and inflation data seems more favourable."

The RBNZ shocked markets with a 50bp hike at its April meeting, lifting the Overnight Cash Rate to 5.25% – despite data suggesting the economy had slowed (see: MNI RBNZ WATCH: 50 Basis Point Hike Despite Slowing Economy). Overnight index swaps now see rates falling back to 5.2% by year’s end.

LABOUR FOCUS

Michael Reddell, independent economic commentator and former special adviser, economics, at the RBNZ, said the Reserve’s last statement already indicated that data would dictate further moves.

“The fragmentary data we have on the labour market isn’t suggesting a sharp fall over the March quarter, but we don’t have a clear picture on wage inflation as yet or the other measures around the sides, such as overall capacity and the labour gap,” he said. “But unemployment has started to move in the right direction to start pulling inflation down.”

The RBNZ will likely hold rates in May to assess the full impact of hikes to date, Reddell continued. “[The RBNZ]’s last statement shifted to a more neutral basis and this was a big change from the last two years, which was a consistent tightening bias,” he added. “If you take it at its word – and the Bank does have a bad record of lurching or not being consistent – then you can’t rule out a reasonable possibility of no change at the next meeting.”

Leo Krippner, research fellow at the Singapore Management University and former senior adviser at the RBNZ, agreed a pause would not surprise. “A lot of its peer central banks have held recently while they reassess – there’s safety in numbers,” he noted.

Any pause, however, would likely be temporary as real rates – not just in New Zealand – remain negative, Krippner argued. “Even if central banks have paused at the moment, and the RBNZ decides to do the same, I wonder if there is more to come in future,” he commented. “Maybe I’m just an ‘old school, central banker’, but we really do need to get positive real interest rates to actually get on top of inflation. Even though inflation has eased, at present, a lot of the easing has been tradable-related. Core inflation is still quite elevated and persistent.”