RBNZ: A steady bearing - ANZ

There was no change in interest rates and a similar tone to that expressed in May while the RBNZ’s clear neutral stance remains, explains the research team at ANZ.

Key Quotes

“We still hold the view that the RBNZ will likely tighten next year, given our belief that the economy will grow at a rate that will gradually eat into capacity. However, the RBNZ is some way away from embracing that mind-set. It will not react until it sees broad-based inflation.”

“Key Points

As expected, the RBNZ left the OCR at 1.75% this morning, and maintained a clear neutral tone. Importantly, but unsurprisingly, the RBNZ reiterated that “Monetary policy will remain accommodative for a considerable period”.

There were some tweaks in the language, but by-and-large, the message and tone were similar to the May Monetary Policy Statement. The RBNZ is mindful of the uncertainty facing the global growth and inflation outlook; it maintains a positive view towards domestic growth (despite the latest GDP disappointments – which it appears to be looking through, as are we); it is watchful with regards to housing; and while it expects inflation to settle at the target midpoint eventually, it does not really appear convinced on that front yet. There are a number of moving parts, but caution prevails. 

It’s still softly jawboning the NZD. Following a little more comfort in May, the RBNZ has acknowledged that the NZD has risen since then and believes that “a lower New Zealand dollar would help rebalance the growth outlook towards the tradable sector”. There is nothing stern in this and it’s hard to argue against currency strength when your terms of trade are set to hit an all-time high. Given the NZD’s spike, the market was obviously looking for something more.

We are still left with the clear impression that the hurdle for policy action (in either direction) remains high. The RBNZ continues to see “numerous uncertainties” shaping the outlook and is hesitant to act (or to even signal likely future action). And we suspect that will remain the case for a while yet. Most importantly, we doubt the RBNZ will be ready to embrace a tightening mind-set until there are clearer signs that domestic inflation is broadening beyond just housing. 

We believe the underlying pace of economic momentum is such that spare capacity is gradually being absorbed. The labour market is critical to watch at present. We think it’s tightening, with wage growth set to gradually accelerate, providing a push to inflation. At some stage that will require a shift to an explicit tightening stance by the RBNZ, but we are a long way from that point. Instead the RBNZ’s focus is on evidence that actual inflation is picking up and broadening. We’re simply not seeing that at present. Our Monthly Inflation Gauge will provide timely signals on the underlying pulse.

We’re sticking to the view the OCR is likely to move up in mid2018, but that’s still a long way off.”