The RBNZ laid out a stark warning in the July OCR review, hinting that further rate cuts could be on the cards if financial conditions don’t ease in line with their projections.
There’s no doubt that the high NZ dollar is a significant concern for the RBNZ, perhaps even more than the market realises. But on the other hand, we think there has been enough evidence about the pace of the global recovery – and more importantly, New Zealand’s place in that recovery – to assuage many of the RBNZ’s concerns. We expect no further rate cuts in this cycle, but the market could well be surprised at how long the RBNZ are willing to hold off on hikes.
Consensus forecasts for NZ’s trading partner growth have been revised up in the last few months, to a still-miserable -1.9% for this year but a more robust +2.4% for next year. Forecast revisions tend to have momentum, so it’s likely that there are further upgrades to come. Importantly, the RBNZ have been caught the wrong way around on this – they have been assuming further downgrades, especially for 2010 as we get closer to the date.
At home, it’s clear that the economy has been gaining momentum since the middle of this year, aided by low interest rates, fiscal stimulus and rising net migration flows. House sales are rising, prices have stabilised, building consents are picking up from record low levels, retail spending has shown signs of life, and consumer and business confidence are rising. The recovery has been described as ‘patchy’, but it’s easy to forget that the boom times were just as ‘patchy’, with several sectors such as manufacturing and tourism missing out.
