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

--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

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