RBNZ: Uncertainty dominates rate stagnation – BNZ

Stephen Toplis, Head of Research at BNZ, notes that the RBNZ did its very best to produce an identical statement to its February Monetary Policy Statement (MPS) when releasing its OCR review today.

Key Quotes

“However, as we had anticipated, it was forced to comment on the fact that GDP was surprisingly low in Q4 and that the upcoming CPI will likely surprise to the upside. It actually negotiated this minefield quite well (at least in a marketing sense) but we continue to believe the Bank is understating the extent and impact of likely inflation over the next few quarters and will, eventually, be bullied into raising interest rates earlier than projected in the MPS. Equally, however, we remain of the view that the market is a tad premature in its pricing of the first rate hike.”

“Uncertainty remains front of mind for the RBNZ. This uncertainty appears to have been exacerbated by recent GDP and CPI developments which are seen as aberrations and, hence, are simply adding to the confusion. To an extent, we concur with that view. We are on record as saying that the Q4 GDP outturn of 0.4% was a one-off and are forecasting a bounce to 0.7% (or higher) in Q1. Similarly, while we are forecasting a 0.9% Q1 CPI reading this does not mean we’d annualize this reading to conclude inflation was running at 4.0%. Quite the opposite, in fact, as we see annual CPI inflation sitting at or around 2.0% for the foreseeable future.”

“Where we appear to differ from the central bank’s view is that we feel less uncertain that annual inflation will hit 2.0% and stay there. Accordingly, it will necessitate the cash rate moving to neutral faster than the RBNZ cares to believe.”

“But only time will tell whether we are right and the RBNZ will give itself that time. That’s why we remain of the view that there is almost no chance of a rate hike this year and very little chance of a rate hike in the first quarter of next year. Financial markets are, at least, beginning to accede to this with the first hike not now fully priced until March 2018 and the probability of a hike in November having reduced from near 50% to just over 30%.”