According to the analysts at Westpac, the recent GDP data for the December quarter showed that the New Zealand economy grew by only 0.4% in the final quarter of last year and against this backdrop, they expect the Reserve Bank to hold the OCR at 1.75% at this week’s review and to maintain a neutral outlook for the policy rate.
“While we certainly wouldn’t gloss over the soft December outturn, at the same time we’d caution against taking too gloomy a view of it. Much of the drag on growth came from specific issues in the primary sector.”
“Looking ahead, we expect a moderate pace of growth to continue. Migration inflows and tourist arrivals hit record highs in January, meaning that “people power” will remain an important part of the growth story, boosting activity in services sectors in particular.”
“However, there are also factors that are expected to have a diminishing impulse on growth – notably, housing and construction. Higher interest rates and loan-to-value restrictions have taken their toll on the housing market, with the rate of house price inflation continuing to slow in February. And in Auckland and Christchurch we’ve seen prices flattening off. That’s likely to have an impact on consumer spending, since housing is an important part of New Zealanders’ wealth.”
“This week, the main event locally is the Reserve Bank’s OCR review on Thursday. In its February Monetary Policy Statement, the Reserve Bank left the OCR unchanged and pointedly moved away from an easing bias to a more neutral outlook for interest rates. We suspect the policy statement will be largely unchanged this time, retaining the message that “monetary policy will remain accommodative for a considerable period”.”
“Indeed, the balance of economic news in recent weeks has been on the softer side, including the softer GDP outturn, the cooling housing market and declines in global dairy prices. This makes the case for an OCR increase look even more distant.”
“Balancing the negative factors, near-term inflation is looking stronger. Food prices in particular have risen sharply, but these can be volatile and some of the recent gains are likely to unwind. With inflation still tracking on the lower side of the 2% target, the Reserve Bank has plenty of time to make the judgement about whether recent price gains will persist. As a result, we expect the OCR to remain on hold for a prolonged period.”