We expect Thursday’s Monetary Policy Statement to maintain the tone of recent RBNZ statements, with rate hikes likely to begin around mid-year.
This may come as a surprise to the market, which has taken some of the softer data in recent weeks – such as inflation, unemployment, retail spending and house sales – as a sign that the expected timing of OCR hikes may be pushed out. Since earlier this year, market pricing for the first rate hike has been shifted out from March to June – essentially in line with the RBNZ’s expectation of “around the middle of 2010”.
However, we don’t think the RBNZ will follow suit and downgrade their interest rate forecasts, for two reasons. One is that the RBNZ are unlikely to have been rattled by the recent data as much as the market was. Looking through the main data releases, the biggest shocker was the Q4 unemployment rate of 7.3%, though as a lagging indicator the RBNZ should still be comfortable with the view that unemployment is at or close to its peak.
On the other hand, capacity utilisation has quickly rebounded to above-average levels, so the overall signals on resource pressures are mixed.
The 0.2% drop in the Q4 CPI was a downside surprise to the market, but not to the RBNZ. And the near-term inflation picture is not looking as benign as the RBNZ hoped: higher food prices, higher fuel prices, rising car prices, tertiary fee increases, higher pricing intentions, and the weaker exchange rate all point to Q1 inflation of around 0.9%, compared to the RBNZ’s previous forecast of 0.1%. Inflation expectations remain stubbornly high, with the latest survey finding that businesses expect annual inflation to reach 2.7% in two years’ time, compared to 2.6% three months ago.
