Thursday, September 11, 2014

RBNZ on hold until next year

As was universally anticipated the Reserve Bank of New Zealand left the Official Cash rate unchanged today.  Having flagged a “period of assessment” following the last 25bp hike in July, the focus has been on how long a pause would ensue and how much more tightening the RBNZ thought was now warranted.

There were no surprises in the assessment of the factors during the economy at the moment.  The RBNZ sees growth continuing to be supported by increasing construction activity, ongoing strength in consumption and business investment with the high level of the net migration also adding to domestic demand.  But the RBNZ sees growth moderating in response to the recent decline in commodity prices and policy tightening.  That said, their forecasts of economic growth are largely unchanged from the June MPS.

As we have come to expect the exchange rate came in for special mention with the RBNZ commenting that it is yet to adjust materially to lower commodity prices and repeating the view that its current level remains unjustified and unsustainable.

The RBNZ acknowledges that the economy is adjusting to the steps they have taken over the past year.  They also acknowledge that house price inflation continues to ease and that CPI inflation remains moderate.   Indeed the change to the Bank’s interest rate projections appears more a reassessment of inflationary pressures than changes to the growth outlook.

However, like us they also believe that spare capacity is being absorbed and that non-tradeables inflation will increase.  That will require further policy adjustment in time.

Interest rate projections appear (it’s always a tad blurred!) to envisage a resumption of the tightening cycle in June next year, with a peak in the 90-day bill rate of 4.8% in mid -2017.  That’s broadly in line with the projections in our latest edition of New Zealand Insights where we expected the RBNZ would be on hold till March next year with an OCR peak of 4.5%, although we expect the Bank will get there more quickly by early 2016.