With the New Zealand economy showing some signs of stabilisation, we have revised our interest rate forecasts and no longer anticipate further OCR cuts in this cycle.
Over recent months the RBNZ will have noted the resilience of activity in developing Asia and Australia, an improvement in credit market conditions, rising business and consumer confidence, a pickup in the housing market, and a strong turnaround in net migration. The latter is particularly important for the RBNZ. Just a few months ago they were forecasting a net inflow for this year of around 6,000; as of May, the annual inflow was over 11,000 and appears set for a net inflow of more than 20,000 this year. While the cause of the turnaround in migration is different from previous cycles – mostly New Zealanders either staying or returning home – history shows that the net flow can have a powerful influence on economic activity.
We acknowledge that there are still substantial risks to an economy that’s already a year and a half into recession: the NZ dollar is stubbornly and unhelpfully high, longer-term interest rates have pushed up, swine flu has the potential to extend the recession for another quarter or so, and there is always the risk of another round of upheavals in global financial markets. But in our minds, these are not enough to justify further rate cuts as a central view.
While the market is pricing in rate hikes by early 2010, we think it will be more like the latter part of 2010, as the RBNZ has signalled. Initially, rate hikes will be aimed at taking the OCR back to neutral from extremely low levels, once the economy is on a firmer footing. But the RBNZ has plenty of time on its side – the spare capacity that has built up in the New Zealand and global economies after the prolonged recession will keep inflation pressures at bay for some time.
