One era ends, another begins?

The Reserve Bank has now formally shifted from easing mode to a neutral stance. It even signalled that the next OCR move is likely to be up – just not for quite some time. The Bank also confirmed that Governor Graeme Wheeler will not seek a second term, and that the search for the next Governor will begin after the election on 23 September.

The February Monetary Policy Statement was similar in tone to the previous one in November. The RBNZ remains upbeat on the outlook for New Zealand, while wary of economic and geopolitical factors offshore. The latter is clearly a reference to the Trump administration, with an escalation of trade protectionism being singled out as a major risk.

Locally, the economy continues to grow at a solid pace, though with no real sense that it’s exceeding its potential to any significant degree. Record net inflows of migrants are adding to demand, but they’re also adding to the economy’s productive capacity, especially given that arrivals are skewed towards prime working-age groups. Unemployment is expected to continue to recede gradually, with a muted pickup in wage growth.

Inflation is now back within the RBNZ’s target range of 1-3%, having spent the previous two years below that. Perhaps more importantly, the RBNZ’s inflation expectations ‘scare’ has now passed. In early 2016, surveyed inflation expectations fell sharply in response to a second year of very low headline inflation. The RBNZ became concerned that expectations could become unanchored from the 2% target midpoint, and responded with a further round of OCR cuts. However, with headline inflation popping higher again, expectations have followed suit, rising to 1.92% for two years ahead in the latest survey.

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