In ordinary circumstances this week’s Official Cash Rate review would be an incredibly bland and easy-to-call affair. At the September Monetary Policy Statement the Reserve Bank issued a “firmly on hold” outlook for the OCR. In coming to that view, the central bank contemplated a weak global economic environment, modest GDP improvement in New Zealand, fiscal austerity, rising house prices, the Canterbury rebuild, low inflation, and the excessively high New Zealand dollar.
New developments since that time have been fairly minor, and neutral for monetary policy on balance.
On the downside, last week’s September quarter Consumer Price Index was weaker than expected. Annual inflation has now reached a 13-year low of 0.8%, mainly due to the strong exchange rate which has suppressed prices for internationally tradable goods and services. However, quarterly inflation of 0.3% was only touch below our forecast of 0.4%, and that minimal surprise was mainly due to quirky falls in domestic airfares (-7.8%) and vehicles (-2.8%). There was plenty in the report to back our view that we have passed the low point for inflation in New Zealand. The effect of the higher NZ dollar is now fading. From here on, construction cost inflation associated with the Canterbury rebuild will become a more pervasive force for inflation. We note that consumer prices for “purchase of new housing” in Canterbury have risen 9.6% over the past 12 months – even before the Canterbury rebuild has ramped up to full pace.
The other key downside development has been a run of data suggesting that the NZ economy lost momentum heading into the second half of 2012, which we discussed a week ago.