REPEAT: MNI STATE OF PLAY: Time For RBNZ To Change Guidance

Repeats Story Initially Transmitted at 07:40 GMT May 9/03:40 EST May 9

--RBNZ Expected to Leave OCR on Hold at 1.75%

--Orr's Maiden Appearance As Governor At Post SMP Press Conference

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand is expected to leave the

official cash rate unchanged Thursday, but there is a possibility it could

change its forward guidance to reflect the next move in rates is likely up.

     With an improved outlook for global growth and signs of global inflation

pressures building, along with greater conviction that local inflation would

move towards the mid-point of the target band, the RBNZ may be ready to change

the forward guidance.

     Since November 2016, when the RBNZ cut the OCR to its current 1.75% from

2.0%, its guidance has suggested the possibility of the next move in the rate to

be up or down, even though the OCR forecasts signalled a steady or rising path.

"Numerous uncertainties remain and policy may need to adjust accordingly," the

RBNZ has said.

     The RBNZ's OCR decision and release of Monetary Policy Statement is due at

0900 hours New Zealand time Thursday (2100 hours GMT Wednesday).

     --GUIDANCE TWEAK

     This doesn't mean there are no longer scenarios where the OCR may have to

be cut. Indeed, since February there has been an escalation in risks that would

lead to higher funding costs for New Zealand banks. But the RBNZ will likely

discuss it as an alternative scenario, rather than leaving it in the central

scenario. This is because given the improved backdrop in which lending rates

could rise, it is more likely to delay any future OCR hike rather than lead to a

cut.

     In line with the change in guidance, it is likely the RBNZ will tweak the

OCR profile to signal the first hike may come slightly earlier than the

late-2019/early-2020 suggested in the forward track.

     This will be new Governor Adrian Orr's first OCR decision and because the

decision will be accompanied by the quarterly Monetary Policy Statement (SMP),

it will also be Orr's first press conference.

     As he is stepping on new ground, Orr might resist making any significant

change in the language suggesting a change in monetary policy stance. At the

same time, though, he will be keen to leave his own "first impression."

     The RBNZ has said the SMP will look different from previous editions due to

the increased use of visuals to help explain both the decision and the

assessment of economic conditions. There will also be changes in the order of

some chapters, but it is unclear if the changes have been initiated by Orr or

were already in the pipeline.

     --CPI MAY HIT 2% SOONER

     New Zealand's Q1 CPI was in line with the RBNZ's expectation, but there

were few details in the data that could lead to some upward revision in

forecasts. In particular, the data showed signs of inflation pressure outside

the housing and household utilities growth, and a slowing in the pace of decline

in clothing and footwear/communication growth. 

     Importantly, the RBNZ's sectoral factor model which is its preferred core

inflation measure, accelerated in Q1, rising 1.5% q/q following an upward

revision in Q4 to 1.5% (from 1.4%) and followed three straight quarters at 1.4%.

     The RBNZ may also upgrade its tradable inflation forecast due to the recent

increase in oil prices, and because of improved global economic conditions and

rising  inflationary pressure.

     A slightly lower profile for the exchange rate would also add to the upside

risk on inflation, and help in bringing forward the 2% projection from September

2020, as suggested in February.

     That would be a signal that the OCR might rise earlier than projected back

in February.

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