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MNI STATE OF PLAY: Risk Of Dovish RBNZ As Growth Worry Weighs

By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to once again
leave the official cash rate unchanged and keep the "up or down" guidance but
the balance of risks may show a slightly dovish shift.
     The RBNZ's OCR decision is due at 0900 hours local time Thursday (2100
hours GMT Thursday) and the rate is expected to be left at 1.75%. The decision
will be accompanied by the quarterly Monetary Policy Statement and will be
followed by a media conference with Governor Adrian Orr and his core team an
hour later.
     --RISK SHIFTING FROM INFLATION TO GROWTH
     This will be Orr's second MPS but it will be one of the more interesting
ones for the RBNZ as risks move from the inflation front to growth, and this
could have implications for future inflation and the labor market.
     At face value, it appears the RBNZ is finally on track, even ahead, on
inflation moving closer to the mid-point of the target band, and employment is
at sustainable level, and thus the forecast for the OCR track could be
maintained or even brought slightly forward.
     Inflation slowed in Q2 but met the RBNZ's forecast on both q/q and y/y
basis, and while non-tradable inflation slowed in q/q terms, in y/y terms it was
ahead of the RBNZ's forecast. Importantly, the RBNZ's core inflation measure
accelerated in Q2. The exchange rate is also lower than the RBNZ's projection in
May, and adds to the outlook for inflation.
     The unemployment rate rose marginally in Q2 but employment growth was
strong during the quarter, and wage growth accelerated as expected. Employment
remains around the maximum sustainable level.
     However, this forecast could get muddled by emerging risks to growth, both
domestically and from offshore, and the RBNZ now faces a tough job on how to
quantify those risks, and importantly make a judgement on how it might affect
future inflation and employment forecasts. A downgrade in growth means spare
capacity in the economy is bigger than the RBNZ estimated in May.
     As it stands, the balance of risks appear to be downside, with some risk
that the OCR forecast track would be pushed back slightly.
     --WEAK BUSINESS SURVEYS
     New Zealand's GDP growth slowed in Q1, growing 0.5% q/q and falling short
of RBNZ's 0.7% forecast with the biggest disappointment coming from flat
household spending and fall in construction. The RBNZ acknowledged the weak
outturn in the OCR statement in June.
     Perhaps, more important is the outlook for GDP given the signals from
business surveys. The ANZ's business survey for July showed confidence dropping
deeply into negative to the lowest since May 2008 and activity outlook also
falling to the lowest since May 2009.
     The NZIER's quarterly survey of business opinion showed a net 19%
businesses expecting a deterioration in economic conditions, more pessimistic
than the 10% seen in Q2. The survey showed businesses are especially concerned
about profitability because of rising costs, including labor costs due to lift
in minimum wages, but are unable to pass on increases through fully raising
prices.
     Another important feature of the business surveys is the weaker outlook for
construction. The outlook for construction may be lower than the RBNZ's already
weak forecast in May.
     The RBNZ could also downgrade growth outlook due to weaker profile for
household consumption than it forecast in May, and also due to the effect of
trade tensions on its trading partner growth, though this one may be difficult
to quantify. In any case, global trade tensions would form part of the
discussion on risks to the forecast.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MX$$$$]

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