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REPEAT: MNI RBNZ STATE OF PLAY: Status-Quo But Dnside Risk

Repeats Story Initially Transmitted at 06:35 GMT Sep 27/02:35 EST Sep 27
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand is likely to maintain a
neutral bias for its monetary policy outlook in its policy statement Thursday,
but there may be small tweaks in the statement around growth and inflation that
could suggest some increase in downside risks.
     The official cash rate is expected to be left unchanged at 1.75% when the
RBNZ publishes its decision on Thursday at 0900 local time (20:00 GMT
Wednesday). The policy statement's last paragraph is also expected to remain the
same: "Monetary policy will remain accommodative for a considerable period.
Numerous uncertainties remain and policy may need to adjust accordingly."
     This will be Governor Grant Spencer's first OCR statement. Spencer will
serve in an interim capacity for six months while a new governor is chosen to
replace Graeme Wheeler, whose five-year term ended Tuesday.
     Spencer was previously deputy governor for financial stability, and given
the focus on financial stability by many central banks, including Reserve Bank
of Australia, Spencer is unlikely to err towards the side of more easing but
that may not stop the RBNZ from highlighting any downside risks.
     His key comment on monetary policy is from a speech in 2014. "Monetary
policy, in pursuing price stability, can have significant effects on financial
stability, particularly if regulatory leakage is reducing the effectiveness of
macro-prudential policy. There can be a case for tightening monetary policy on
financial stability grounds, as long as doing so does not pose a threat to
medium-term price stability."
     The main risk from financial stability side at the moment would be a
resurgence in house prices once political uncertainty fades but that's only a
risk because there would be other factors that could continue to weigh on house
prices. 
     The RBNZ usually refrains from making any key changes when the OCR decision
isn't accompanied by the full Monetary Policy Statement and media conference
that happen once every three months. This time there are other reasons to
maintain the status quo: this is Spencer's first statement, just two days of
assuming his new role; and the general elections last weekend resulted in a hung
parliament and it will be at least a fortnight before it's known which parties
will form the next government.
     At the same time, the RBNZ will highlight any developments in the past six
weeks that would have implications for monetary policy going forward. Thus, any
tweaks in the statement need to be assessed carefully.
     The most important change may be in the assessment of the domestic growth
outlook. While second quarter GDP was in line or slightly lower than the RBNZ's
forecast, the details don't bode well for the future, as a strong contribution
to growth came from tourism activity related to one-off sporting events, and
construction activity declined. In addition, the latest ANZ business outlook
survey showed that the construction outlook had weakened for both the
residential and commercial sectors. 
     The details raise some doubts about the outlook for consumption and
construction, which, in turn, could raise doubt about the RBNZ's overall growth
and inflation outlook. So it is likely the RBNZ will tweak somewhat its
description of the overall outlook. 
     There is also a good chance that the election results, with each of the two
major parties forced to negotiate with the populist New Zealand First party to
form a new government, will result in new immigration restrictions that would
cause net immigration to decline more than the RBNZ expects. This would be is a
key downside risk for the economic outlook.
     The statement's paragraph on the exchange rate will be interesting, given
that prior to each of the last two statements the trade-weighted exchange rate
had increased compared to the previous meeting. This time, the dollar has
actually fallen for a combination of reasons, including a rise in the Australian
dollar cross and domestic political uncertainty. Those factors could fade if the
market scales back its outlook for the first Reserve Bank of Australia rate hike
and domestic political uncertainty settles. 
     It is therefore likely that despite the recent drop in the exchange rate
the RBNZ may retain the wording in its previous statement: "A lower New Zealand
dollar is needed to increase tradables inflation and help deliver more balanced
growth."
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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