Going nowhere fast

As expected, the RBNZ left rates on hold last week and struck a more dovish tone. With inflation stubbornly low, we think the RBNZ will keep the OCR on hold until September next year.

The RBNZ sat on its hands last week, leaving the OCR on hold at 3.5%.The accompanying statement, as expected, struck a more dovish tone by removing any reference to future hikes. Instead, the RBNZ reiterated that it’s appropriate to continuing watching how inflation evolves.

Looking at inflation, it’s not hard to see why the RBNZ’s stance has softened. Headline inflation in the year to September was just 1%, right at the bottom of the RBNZ’s target band. Some of this is a result of temporary factors, like declines in food prices, which the RBNZ will largely look through. But the more general inflation picture is also soft. Core measures of inflation, which look at the underlying trend in prices, haven’t picked up, and in some cases came down in the September quarter. Businesses are reporting that cost pressures remain low. Finally, recent declines in international commodity prices are threatening to push headline inflation below 1% in the near term.

New Zealand isn’t the only economy experiencing soft inflation. Many of our trading partners are in a similar basket (the notable exception being Australia). But what makes New Zealand an outlier is that our economy has been growing at a solid pace. Through the year to June the economy expanded at a blistering pace of 3.9%. In recent months some of the drivers of growth have moderated, with falls in commodity prices and the earlier tightening by the RBNZ. Nevertheless, the outlook for growth over the coming year is still robust, underpinned by strong construction and population growth. Historically, this sort of growth has presaged strong increases in inflation. But not so this time.