Soft Landing Forecast, RBNZ More Confident In Outlook

The RBNZ looks to be unlikely to move rates in either direction for now as the economy has been broadly developing as it expects. The MPC did discuss tightening but not easing at its February meeting. Governor Orr noted that the updated staff forecasts were quite positive as they indicate no further rate rises, inflation within the band by year end, improving economic growth and continued jobs growth – a soft landing. This will result in subdued demand though but that’s necessary to return inflation to target.

• Orr said that the MPC is now more tolerant of upside inflation risks, as it is more confident re the outlook than it has been for over a year.
• The RBNZ sees the risks around inflation as “balanced” but its reaction function remains asymmetric towards upside risks. The MPC concluded that a combination of issues had resulted in the “balanced” view but it was particularly pleased with the moderation in business inflation expectations and also noted that GDP revisions pointed to more excess capacity.
• Core and home-grown inflation pressures are easing as the RBNZ had expected. But Orr pointed out that there are some areas which are persistent and one of the hardest areas for the central bank to manage is productivity.
• Countries with high population growth have found it difficult to bring inflation down. He observed that migration has helped to increase NZ’s labour supply and thus temper wage growth but there are now demand effects especially on rents.
• The rise in global shipping costs was discussed at length but the MPC assumed that it is a shock that will normalise and so costs will too over the year but if the issue persists beyond that, then there will be risks of second round effects.