A difference of opinion
|Financial markets are always eager to pick turning points in the economic cycle. That's perhaps unsurprising given the potential payoff in being the first to get it right. But it also means that, from time to time, financial markets can be a bit too keen to get out of the starting blocks when it comes to picking the timing of central bank tightening or easing cycles. We think now is one of those times.
The OCR has been unchanged at 1.75% since November 2016. And we expect it won't be moved until late 2019. In contrast, markets have priced in a rate hike from the RBNZ by early next year.
One reason we are more dovish than the market, or indeed the RBNZ's February Monetary Policy Statement, is that we think that growth will slow this year. GDP growth reached 4% in 2016, but has since slowed to around 3%yr and we think it could slow further in the year ahead. Weaker than expected GDP growth means the economy may struggle to generate the non-tradables inflation required for the RBNZ meet its inflation target.
There are several reasons we expect the pace of GDP growth to remain slow. The recent slump in business confidence is set to weigh on investment, growth in the construction sector will be restrained as the Canterbury rebuild continues to wind down and capacity constraints elsewhere in the country start to bite, and a gradual slowing in net migration will dampen population growth.
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