MNI STATE OF PLAY:RBNZ Stance Unch Despite Fiscal/NZD Stimulus

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand's monetary policy stance

remains unchanged despite incorporating expectations of more fiscal stimulus

from the new government and a lower exchange rate based on the recent

depreciation of the New Zealand dollar.

     The RBNZ's outlook suggests the official cash rate will remain on hold for

longer, with its risk scenarios unchanged from August.

     As expected, the RBNZ left the official cash rate unchanged at 1.75% but a

key surprise was the fact that it had taken account of four of the new

government's policy initiatives in its forecasts even though there is no clarity

yet on the details of those policies.

     The four policies are: the government spending initiatives; the housing

programme; changes to visa requirements; and minimum wage increases. While the

RBNZ acknowledged that the effects of the policies on the economy are uncertain

and depend on how private households and businesses respond, it concluded that

there will be more fiscal stimulus than incorporated in its previous Monetary

Policy Statement in August.

     Overall, however, the RBNZ's assumptions on the stimulative effect of those

policies led to only a small upgrade in its GDP forecast, mainly because it is

expected to be offset by a weaker housing and construction.

     The forecasts for inflation have been raised slightly in the near term in

line with higher-than-expected inflation in the third quarter but overall they

are largely unchanged despite the assumed effect of a rise in the minimum wage.

     The RBNZ's main assumption with respect to inflation is that continued low

global inflation and limited further rises in commodity prices will result in

low tradables inflation in the medium-term. The overall outlook for

non-tradables inflation remains unchanged. 

     "Non-tradables inflation remains below average at 2.6%, consistent with

weak price-setting behaviour and limited capacity pressure. Housing-related

components have continued to support non-tradables inflation, along with

increases in insurance costs and some administrative prices," the RBNZ said.

     Significantly, the RBNZ kept the forecast for the trade-weighted exchange

rate unchanged through the forward projections, expecting the recent fall to be

sustained and feeding through to higher inflation. It is also assuming that the

recent weakening reflects reduced appetite from offshore investors for New

Zealand dollar assets rather than a deterioration in the domestic economic

outlook. 

     The two key risk scenarios were unchanged versus August:

     --global inflationary pressure increases more than expected; 

     --domestic capacity pressure is lower than projected, due to weaker growth

in consumption and residential investment activity.

     If the former risk materializes, the RBNZ expects the OCR to be 100 basis

points higher than its projection. The second risk would lower OCR by an equal

amount by the start of 2020.

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

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