There was the proverbial “no surprises” from the Reserve Bank of New Zealand (RBNZ) this morning. They left the Official Cash Rate (OCR) unchanged at 3.5%, pushed out the next rate hike to the back end of next year, reduced the total quantum of tightening and acknowledged both upside and downside risks.
The key point is that despite recent low
inflation outcomes it is the RBNZ’s judgment that continued strong growth and
the recent decline in the exchange rate will likely see inflation move higher
next year and that in order to keep inflation and inflation expectations contained
near the 2 percent target midpoint “some further modest tightening is likely to
be required”. I concur.
The RBNZ is expecting continued robust 3.0%-plus
growth in the period ahead. Near term
forecasts are broadly the same as ours but we have growth coming off a bit
faster in the back end of the projection period.
The Bank also see’s potential growth holding
up better than I do. It’s certainly the
case that potential growth is strong right now at around the 3.0% level for all
the reasons I’ve written about before. The
RBNZ sees this level being sustained through the projection period. I’m not convinced.
But the key questions for today are when will
the RBNZ start hiking rates again and how high will they have to go? This tightening cycle was always going to
carry more than the usual degree of uncertainties. Key questions for the post-Global Financial
Crisis environment were, and to a large
extent still are, where the neutral cash rate is, the level of potential growth
and how households would responding to higher interest rates and new Loan to
Value Ratio (LVR) restrictions.
In the Monetary Policy Statement today the
RBNZ flagged three important considerations in determining how quickly
and how far rates would need to rise: how actual pricing decisions interact
with measures of capacity pressure and inflation expectations; how house price
inflation develops in the face of still-low interest rates, strong net
migration, restrictions on high loan to value ratio mortgage lending, and
supply shortages; and how reduced dairy farm incomes affect spending.
The upside risk from housing and the downside
risk to rural incomes and spending was reinforced this week with strong REINZ housing
data out this weeks and the downward revision to the Fonterra payout. And of course oil prices are lower since the RBNZ finalised their forecasts.
The RBNZs interest rate projections show
interest rate increases beginning again from December next year. The projected track has the 90-day bank bill
rate rising gradually over the projection period to 4.5% at the end of 2017, a
level that’s 30 bps lower than their September projections. And of course with both upside and downside
risks to the outlook, the RBNZ states that further policy adjustments will
depend on data emerging over the assessment period.
For our take on the outlook for the New
Zealand economy and monetary policy, have a look at our December edition of New Zealand Insights
which you can find here.