Thursday’s Monetary Policy Statement comes at an interesting juncture for the New Zealand economy.
Activity is still contracting in most parts of the world, but at a slower pace than seen earlier this year – and for a change, the outlook for growth doesn’t seem to have deteriorated further since the last OCR review. Meanwhile, financial markets are sending a clear signal that they believe the worst-case scenarios for the global economy have been avoided.
It’s clear from the RBNZ’s recent comments that they are sceptical about the near-term prospects for recovery, and they remain biased towards further easing if needed. Even so, we think there is enough reason to leave the OCR unchanged this time – if their scepticism turns out to be justified, they retain the option of cutting rates again later in the year, while if the ‘green shoots’ turn out to be genuine, they will have little to regret by not easing further.
Developments since the April OCR review have been mixed – which in itself is a notable development. Monthly indicators in most parts of the world suggest that manufacturing, trade and house prices have been falling at a slower pace in recent months. To be clear, this is hardly a sign of strength – the best we can say is that a global economy that was in freefall at the end of last year has since deployed the parachute. But the change in momentum is a necessary first step towards recovery.
