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MNI STATE OF PLAY: RBNZ OCR Message Unch, Nod To Downside Risk

MNI (London)
--RBNZ Policy Decision Due Thursday 0900 Local time (2100GMT Weds)
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to leave the
official cash rate and the key message on the rate outlook unchanged, but the
narrative on local and global growth could suggest downside risks are picking
up.
     The RBNZ's OCR decision is due to at 0900 hours New Zealand time Thursday. 
     In May, new Governor Adrian Orr made some important changes in the one-page
statement and given this will be only his second one, there is some uncertainty
on whether the new style will be continued or the entire statement will be
redrafted.
     But what is very likely is the OCR will be left at 1.75% and the neutral
stance will be maintained. The RBNZ is expected to retain the message, "The
direction of our next move is equally balanced, up or down. Only time and events
will tell." 
     There was some inconsistency in the May statement when the RBNZ said the
OCR will remain at 1.75% for "some time to come", adding "we expect to keep the
OCR at this expansionary level for a considerable period of time."
     The RBNZ may amend this to be more consistent on the language around the
timeframe for steady policy rate.
     --DOWNSIDE GROWTH RISKS
     Since the last Monetary Policy Statement in early May, uncertainties on the
global front have increased and domestically growth surprised to the downside.
     Last month, the RBNZ said that although the risks around the global outlook
had become more balanced over the past year, the recent tightening in global
financial conditions is a downside risk to growth.
     In line with that, the RBNZ's judgement on was that the risks on global
growth was balanced. However, developments on international trade policy and
economic developments in a few emerging markets in the past month means risks
are tilted to the downside.
     Added to that is the fact that global financial conditions have also
tightened further.
     Locally, Q1 GDP growth at 0.5% q/q was lower than expected and also fell
short of the RBNZ's own 0.7% forecast. A bigger disappointment in the GDP data
was flat household spending and the fall in construction. 
     The ANZ business survey for June, published Wednesday, has raised some
question marks about the outlook for growth, especially the outlook for
construction. The survey showed a fall in both confidence and activity outlook,
with confidence falling deeply into negative territory and back to November
lows.
     The survey points to economic growth of around 2%, whereas in May the RBNZ
projected growth average of 3.0% in 2018, 3.3% in 2019 and 3.1% in 2020. The
RBNZ's assessment in May was that the output gap was around zero, and would
increase to 0.9% of potential output by 2020, thus supporting a return to 2%
inflation target mid-point.
     --INFLATION TOLERANT, BUT NOT ON EMPLOYMENT
     By itself, any likely extension in the timeframe for inflation to reach the
target midpoint isn't a downside risk for the OCR. An MNI Insight (MNI INSIGHT:
RBNZ Unperturbed If Inflation Is Low For Longer) published Tuesday said the RBNZ
doesn't see much issue with low inflation for longer.
     But if growth momentum slows and affects the outlook for employment, then
the RBNZ may see the need for a lower OCR, especially if any slowdown is also
accompanied by upward pressure on mortgage rates.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MX$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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