MNI STATE OF PLAY: RBNZ Hold With Largely Unch CPI, OCR Fcasts

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to leave the

official cash rate unchanged and maintain its neutral monetary policy outlook by

leaving intact its projection for the official cash rate.

     The OCR decision is due Thursday at 9 am local time (2000 GMT Wednesday),

with the RBNZ widely expected to leave the rate unchanged at 1.75%. The decision

and the outlook will be based on updated forecasts for the economy to be

published in the quarterly Monetary Policy Statement (MPS), due at the same

time. 

     At the last MPS in August, the RBNZ's projection showed the OCR remaining

unchanged at 1.8% until the end of 2019, before rising to 2.0% in March 2020 and

staying there in June.

     RBNZ interim governor Grant Spencer is due to hold a media conference at 10

am local time (2100 GMT Wednesday) to explain the central bank's decision and

outlook. 

     This will be Spencer's first MPS release and also his first media

conference as governor. While the rate decision will be an easy one, finalizing

new forecasts for the economy has been one of the toughest tasks Spencer and his

team have faced given the recent change of government and lack of clarity on how

some of their key policies will take shape.

     There are other forecast challenges, too, including: the outlook for the

New Zealand dollar after its recent sharp fall; the outlook for the construction

sector; the impact on consumption from the slowing in housing market activity;

and the outlook for demand as net migration slows.

     As a starting point, the consumer price index was higher than expected in

the third quarter and the exchange rate has rebounded in recent weeks but core

inflation has been subdued. This could lead to a slight rise in the inflation

forecast in the near term but little change to the overall price outlook.

     The key question for the RBNZ is whether the recent fall in the New Zealand

dollar will be sustained, and what factors would keep the currency lower or

cause it to rise. While global factors have played some role, much of the fall

was in response to political uncertainty and based on the view that the new

government favored a lower exchange rate. 

     If the market forms a more positive view on the new government, there is a

possibility the exchange rate could rebound. But if it remains lower, the main

question would be whether it reflects the market downgrading the New Zealand

economic outlook.

     Amid these uncertainties, it is unlikely the RBNZ will make any significant

downward shifts in its forecast for the trade-weighted exchange rate. That is

one reason the inflation forecasts next year are unlikely to shift higher, which

would in turn support no change in the OCR track.

     One of the key factors that supported the growth outlook was expectations

of increased consumption. However, slowing housing market activity, a weakening

in net migration and a fall in dairy prices are key risks to that outlook. Some

of this will be offset by fiscal stimulus from the budget, which the RBNZ

already took into account in its August policy statement. 

     While the new government is expected to enact more fiscal stimulus, this

may be offset by their policies further weakening the already slowing housing

market and net migration. 

     Overall, the RBNZ may downgrade its growth forecasts based on a lower

consumption profile and weaker construction activity. 

     A slightly lower growth profile, a small downward shift in the exchange

rate forecast and little change in the inflation outlook means the RBNZ is

likely to maintain the message in its last policy statement: "Monetary policy

will remain accommodative for a considerable period. Numerous uncertainties

remain and policy may need to adjust accordingly."

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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