FYI | Oct 26 2009
By Chris Shaw
Since the June quarter Monetary Policy Statement (MPS) by the Reserve Bank of New Zealand (RBNZ) ,economic conditions have improved a good deal, so while economists unanimously remain of the view there will be no increase in interest rates at this week’s meeting a change in the RBNZ’s language with respect to the future timing of any increase is likely.
The previous MPS suggested rates would remain unchanged until late in 2010 but with economic data surprising to the upside the RBNZ rhetoric is expected to become increasingly hawkish, Credit Suisse seeing the current easing bias being removed as a pre-cursor to rates moving higher next year.
Commonwealth Bank’s New Zealand economist Chris Tennent-Brown agrees as he notes there have been five areas where economic data has been stronger in recent weeks, these being the global growth outlook, the New Zealand housing market, the June quarter GDP outcome, September quarter CPI estimates and business confidence for the same period.
Commonwealth Bank expects NZ trading partner growth will fall by 1.4% this year then rise by 2.9% in 2010, which is better than the RBNZ’s forecasts of minus 1.8% and 2.4% respectively. At the same time the Kiwi housing market remains tight, with prices continuing to rise as supply has been slow to respond to a lift in demand.
Domestic growth was also stronger than expected in the June quarter and both inflation and business confidence in the September quarter were higher, all of which indicates an economy recovering better than had been previously priced into expectations. According to Tennent-Brown this will force the RBNZ into action, his forecast now calling for a 50-basis point increase in the cash rate in April next year.
Citi is more aggressive on the timing and sees such a move coming in March, though if rates were to be lifted earlier than this it expects 25-basis point moves rather than a first up 50-basis point increase. The broker notes current market pricing suggests there is an 8% chance of a 25-basis point increase occuring in January.
Credit Suisse expects this week’s meeting will see the removal of the RBNZ’s current easing basis, so opening the way for an earlier and likely more aggressive tightening profile. The broker sees the previous profile of a hike in the latter part of 2010 as being brought forward, the broker seeing the middle of next year as the most likely time rates begin to increase.
National Australia Bank expects the language of the RBNZ statement will continue to suggest rates will remain on hold until the second half of 2010, though it too sees scope for a change with respect to timing as a change could well come early in the December half rather than the latter part of the year as has been the indication until now.
