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

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