Last week we pointed out that the RBNZ’s relatively optimistic growth forecasts were predicated on a much easier mix of financial conditions, with a lower New Zealand dollar expected to do most of the hard work.
As if on cue, the NZD has soared since the Monetary Policy Statement: up more than 10% against the US dollar, and over 6% on the trade-weighted index.
Combine this with the rise in wholesale interest rates since the MPS – which has been sustained despite a sharp drop in long-term rates overseas – and just about everything that could go wrong with monetary settings has gone wrong.
To be fair, the rise in the currency partly reflects a newfound optimism in global markets that the worst is behind us; and to the extent that that optimism is justified, a stronger NZD wouldn’t be such a bad thing. But for the moment, we have to remain sceptical of shortterm market movements and the reasons behind them – for instance, the positive impact of the Fed’s move to buy over $1 trillion of public and private debt needs to be weighed against what drove them to such lengths in the first place.
Hopes for an impending recovery took another hit last week, with another massive downgrade to the global growth outlook. Consensus Forecasts for New Zealand’s main trading partner growth in 2009 were revised down from -0.9% to -1.8% this month, the largest monthly revision yet. By coincidence, this is the same figure that the RBNZ factored into their March Monetary Policy Statement forecasts. Consensus forecasts for 2010 were also revised down to 2.0%, against the RBNZ’s pick of 1.6%. So while these latest revisions won’t sway the RBNZ towards further easing, beyond what has already been signalled, they may be worried that most of their buffer against further negative surprises on the world economy has already been used up.
