RBNZ Governor Bollard’s speech on 14 July, simply titled “Economic Recovery”, gives a clear indication of what to expect from Thursday’s OCR review.
Compared to the June Monetary Policy Statement, the RBNZ appears more confident that the global economy is stabilising and that New Zealand is entering the recovery phase; the main question now is what form the recovery will take. But with the prospect of recovery comes a growing concern that households could revert to their previous ‘borrow and spend’ ways – and keeping interest rates too low for too long would clearly fuel that risk.
The change in the world growth outlook is perhaps the most significant factor for the RBNZ. Consensus Forecasts for growth in New Zealand’s trading partners have been revised up in the last two months to -2.1% for 2009 and 2.2% for 2010, an increase of 0.2% for each year. That’s a modest improvement so far, and still points to weak activity over the next couple of years. But it’s increasingly likely that the ‘Depression Mark II’ scenario that was feared earlier this year has been avoided.
In recent statements the RBNZ have made a point of undercutting Consensus forecasts, partly on the expectation that there would be further downward revisions closer to the date; their June projections assumed growth of -2.6% this year and 1.4% next year. But the gap versus Consensus is now widening, and the risk is that the RBNZ will need to make a significant leap to catch up. The tone of Dr Bollard’s speech certainly suggests a more positive view on the world economy compared to June.
