FYI | Oct 26 2006
By Chris Shaw
In a fitting outcome for what had been seen as a 50:50 decision the Reserve Bank of New Zealand (RBNZ) has made no change to its official cash rate of 7.25% following an improvement to the short-term inflation outlook.
Macquarie Bank suggests the move is a sensible one as there are definite signs of inflation coming down in the short-term, while the slowing in the overall economy will potentially lower the medium-term risk.
The decision followed the release of third quarter inflation figures, which in Maquarie’s view showed clear signs of a deceleration in underlying terms. For the quarter consumer prices rose a lower than expected 0.7% quarter-on-quarter, bringing the year-on-year increase to 3.5% from 4.0% previously.
Contributing to the decline were lower fuel prices, a rebound in the exchange rate and a re-weighting of the CPI (Consumer Price Index). The bank suggests further falls in the headline rate are likely in the current quarter as the full impact of weaker fuel prices flows through. It estimates if all other items rise at the same rate in the December quarter and food and fuel hold steady, the year-on-year rate could fall to as low as 2.5%.
Despite this the RBNZ pointed out in its statement accompanying the decision it remains concerned about medium-term inflationary pressures, particularly as the fall in petrol prices has the potential to spark an increase in domestic consumption.
Commonwealth Bank agrees there has been only a very slight moderation in the medium-term pressures as it notes both wage and employment growth remain strong, which it suggests reduces the chance of a fall in private spending levels.
This leads the bank to suggest that while rates are unlikely to go higher in the medium-term (and it notes the market has adjusted its forecasts to no longer price in further increases), any cut to rates is unlikely for some time. The bank estimates the middle of next year is the earliest any cut can be expected, though there is the chance this timetable could be pushed out if data in coming months are not supportive.
Such a timetable seems to fit with the RBNZ’s own comments, as it made the point while further increases in rates cannot be ruled out any easing in policy remains some way off.
Not surprisingly the New Zealand dollar fell slightly following the decision, though Macquarie suggests it is likely to be a positive move for the equity market given inflationary pressures have been impacting on corporate margins. Additionally, it notes with rates holding steady companies are unlikely to face an increase in funding costs, while also reducing any risk of a downturn in consumer spending.