Flat as far as the eye can see
|The RBNZ left the OCR unchanged at 1.75% in last week's Monetary Policy Statement and shifted to a more neutral outlook. While we think the OCR will be on hold for even longer than the RBNZ expects, last week's migration data and this week's announcement of the Tax Working Group recommendations underscore some of the key uncertainties in this outlook.
The RBNZ's February Monetary Policy Statement adopted a slightly more dovish tone than in November. As expected the interest rate projection was about 20 basis points lower and the Bank returned the comment the "next OCR move could be up or down" to the Statement.
Despite this, the details within the Statement were a little less dovish than the market had been braced for.
This may be because some of the analysis in the document was a little out of date. Notably, the RBNZ is forecasting 0.8% quarterly GDP growth in Q4. That seems implausibly high to us given the weak service sector activity implied by last week's soft Quarterly Employment Survey. As a comparison, we're forecasting 0.3% GDP growth in the December quarter.
Similarly, the RBNZ made no allowance in their forecasts for Stats NZ's new net migration estimates. These have loomed large in our own thinking because lower net migration estimates imply slower population growth, less need to build houses and therefore a weaker outlook for the construction sector than we had previously understood.
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