FYI | Sep 14 2009
By Chris Shaw
The Reserve Bank of New Zealand (RBNZ) surprised no one in keeping its official cash rate on hold at 2.5% last week, with the central bank now largely adopting a spectator role while it monitors the level of the exchange rate and interest rates in the market.
There was one change according to Commonwealth Bank New Zealand economist Chris Tennent-Brown, who points out the RBNZ’s previous easing bias has been softened as a statement indicating rates could move lower in coming months was removed from the public commentary.
Tennent-Brown notes new forecasts from the RBNZ factor in tighter monetary conditions as the trade-weighted exchange rate is now substantially higher than was the case in the June statement on monetary policy. He points out while the RBNZ has the currency’s value declining from current levels, the CBA’s forecasts call for further modest gains in the currency. While the central bank’s outlook for monetary policy now is similar in that the 90-day rate starts to move higher late next year, Tennent-Brown notes the gains are now expected to come faster than was previously expected.
There has been little change in RBNZ growth and inflation forecasts though, as Tennent-Brown points out the composition of the growth outlook has changed somewhat as the initial stages of a pick-up are now expected to be led by the household sector. This means consumption growth has been revised higher, while at the same time expectations for an export driven recovery have been scaled back.
Such an outlook is not without risk however, as the RBNZ continues to be cautious with respect to the sustainability of the recovery largely as it is concerned further gains in the New Zealand dollar and in house prices could limit the pace of improvement in household savings. This could undermine the economic rebalancing expected to take place.
The other major change noted by Tennent-Brown is the RBNZ is now seeing more inflation pressures in the economy, this being driven by a combination of an improving global economic outlook, an increase in net migration figures that is supporting the housing market and signs of better business confidence levels.
While the RBNZ is concerned about the possibility of housing related debt fuelling less sustainable growth, Tennent-Brown takes the view a household-led recovery is not entirely unwarranted as the pick-up in the housing market is not being driven by speculation but by an improvement in fundamentals. The higher migration numbers are boosting demand.
He takes the view the fact the RBNZ didn’t cut rates last week means the cash rate isn’t going any lower, particularly given the central bank’s desire to not stimulate the housing market further by a reduction in interest rates. This means the next move in rates will be up, but Tennent-Brown doesn’t expect a hike before June next year, a month earlier than he had previously forecast.
Given there remains a significant amount of policy stimulus to be unwound, he sees the first steps as bigger ones, meaning 50-basis point moves are likely initially. According to Tennent-Brown, the risks are in favour of an earlier start to the tightening cycle if the economic recovery both domestically and around the world continues.
