Kiwi Tumbles as Labour/NZ First Government Means Status Quo No More

With no single party being able to secure over half of the seats in the parliament in last month's election, the right-wing, populist NZ First party has become a kingmaker. Its leader Winston Peters has just announced that his party would form a government with the Labour Party. Kiwi's sell off after the announcement as the outcome has not been quite priced in. NZ First had cooperated with both National and Labour previously (National/ NZ First from 1996 to 1998, and Labour/ NZ First from 2005 to 2008). It did not show preference over a certain party. Uncertainty has not abated after the decision. Rather, it has increased as it would be the first time in 9 years for the Labour Party, as well as the Labour/NZ First coalition, to be the government. The Green Party has also ratified the "confidence and supply" deal which includes promises of three ministerial positions outside Cabinet, and one undersecretary role, for the party. By not joining the cabinet but sitting in on discussions on areas relevant to the party's portfolios, the Green would be able to "retain distinctiveness". That means, the party might still dissent on certain bills. Meanwhile, with 44.4% of votes and 56 seats, National has become the single largest party in the parliament and the most powerful opposition ever. This might increase the difficult for controversial legislations to get passed.

At the press conference, Labour's leader and the next PM Jacinda Ardern indicated that Labour and NZ First "had more in common than issues that divided them". We analyze below that the policy agendas on immigration, RBNZ and the housing market of both parties would lead to a prolonged easy monetary policy and a weak New Zealand dollar.

Net Immigration

The Labour Party proposes to cut net immigration to around 30K per year, from the current 72K, while the Green Party upholds the idea of "sustainable net migration flow to limit effects on our environment, society and culture". The latter does not object the idea to cut net immigration though it has not suggested a number. NZ First proposes the most restrictive immigration policy amongst all parties. It proposes to attract highly-skilled migrants by sharply cutting numbers to around 10K per annum, from the current 72K. It also proposes to adopt strict control over immigration under "family reunion" and "make sure that Kiwi workers are at the front of the job queue". Reduction in net immigration should weigh on economic growth over coming years.

NZD and Monetary Policy

All of Labour, Green and NZ First demand material change to the RBNZ's monetary policy framework. As we mentioned at the election preview last month, with the back of the Green Party, the Labour party proposes a move to committee-based decision making and a dual mandate that includes employment (price stability already exists) in RBNZ's monetary policy setting. The change to dual mandate is prone to shake confidence in the New Zealand dollar as this would mark one of the biggest changes for the RBNZ since its establishment. Depending how the mandate is formulated, a full employment mandate, together with the current 1-3% inflation target, would theoretically lead to looser monetary policy, or a slower pace of rate hike. NZ First proposes to reform the Reserve Bank Act, aiming at achieving a "more exporter-friendly" RBNZ and "sensible exchange rate regime". This implies lower exchange rate and a more accommodative monetary policy.

Housing

Both Labour and NZ First favor increasing supply of affordable housing. The Labour proposes a KiwiBuild program which aims at building a hundred thousand of "high quality, affordable homes over 10 years, with 50% of them in Auckland". It would also create an Affordable Housing Authority to fast-track development. For NZ First, it has initiated "the New Zealand Housing Plan to revamp the New Zealand housing market covering housing availability and affordability as well as rental homes supply and affordability". If the ultimate goal of lower housing price is achieved, the RBNZ would find it more comfortable to maintain its accommodative monetary policy.