MNI RBNZ STATE OF PLAY: Status-Quo But Dnside Risk Highlighted

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to maintain a

neutral bias for its monetary policy outlook in its policy statement Thursday,

but there may be small tweaks in the statement around growth and inflation that

could suggest some increase in downside risks.

     The official cash rate is expected to be left unchanged at 1.75% when the

RBNZ publishes its decision on Thursday at 0900 local time (20:00 GMT

Wednesday). The policy statement's last paragraph is also expected to remain the

same: "Monetary policy will remain accommodative for a considerable period.

Numerous uncertainties remain and policy may need to adjust accordingly."

     This will be Governor Grant Spencer's first OCR statement. Spencer will

serve in an interim capacity for six months while a new governor is chosen to

replace Graeme Wheeler, whose five-year term ended Tuesday.

     Spencer was previously deputy governor for financial stability, and given

the focus on financial stability by many central banks, including Reserve Bank

of Australia, Spencer is unlikely to err towards the side of more easing but

that may not stop the RBNZ from highlighting any downside risks.

     His key comment on monetary policy is from a speech in 2014. "Monetary

policy, in pursuing price stability, can have significant effects on financial

stability, particularly if regulatory leakage is reducing the effectiveness of

macro-prudential policy. There can be a case for tightening monetary policy on

financial stability grounds, as long as doing so does not pose a threat to

medium-term price stability."

     The main risk from financial stability side at the moment would be a

resurgence in house prices once political uncertainty fades but that's only a

risk because there would be other factors that could continue to weigh on house

prices. 

     The RBNZ usually refrains from making any key changes when the OCR decision

isn't accompanied by the full Monetary Policy Statement and media conference

that happen once every three months. This time there are other reasons to

maintain the status quo: this is Spencer's first statement, just two days of

assuming his new role; and the general elections last weekend resulted in a hung

parliament and it will be at least a fortnight before it's known which parties

will form the next government.

     At the same time, the RBNZ will highlight any developments in the past six

weeks that would have implications for monetary policy going forward. Thus, any

tweaks in the statement need to be assessed carefully.

     The most important change may be in the assessment of the domestic growth

outlook. While second quarter GDP was in line or slightly lower than the RBNZ's

forecast, the details don't bode well for the future, as a strong contribution

to growth came from tourism activity related to one-off sporting events, and

construction activity declined. In addition, the latest ANZ business outlook

survey showed that the construction outlook had weakened for both the

residential and commercial sectors. 

     The details raise some doubts about the outlook for consumption and

construction, which, in turn, could raise doubt about the RBNZ's overall growth

and inflation outlook. So it is likely the RBNZ will tweak somewhat its

description of the overall outlook. 

     There is also a good chance that the election results, with each of the two

major parties forced to negotiate with the populist New Zealand First party to

form a new government, will result in new immigration restrictions that would

cause net immigration to decline more than the RBNZ expects. This would be is a

key downside risk for the economic outlook.

     The statement's paragraph on the exchange rate will be interesting, given

that prior to each of the last two statements the trade-weighted exchange rate

had increased compared to the previous meeting. This time, the dollar has

actually fallen for a combination of reasons, including a rise in the Australian

dollar cross and domestic political uncertainty. Those factors could fade if the

market scales back its outlook for the first Reserve Bank of Australia rate hike

and domestic political uncertainty settles. 

     It is therefore likely that despite the recent drop in the exchange rate

the RBNZ may retain the wording in its previous statement: "A lower New Zealand

dollar is needed to increase tradables inflation and help deliver more balanced

growth."

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

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