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RBNZ Preview – Strong GDP Growth and Inflation Expectations to Anchor RBNZ Optimism

Strong first quarter GDP growth and rapidly rising inflation pressure suggest that the RBNZ would at least maintain a hawkish stance at this week’s meeting. While the monetary policy measures will stay unchanged, policymakers will likely react to market expectations of a rate hike in November, compared with RBNZ’s projection of next year in May. The language in the accompanying statement should be amended to reflect stronger economic outlook.

On the dataflow, GDP expanded +1.6% q/q in 1Q21, after contracting -1% a quarter ago. From the same period last year, the economy grew +2.4%, compared with a -0.8% decline in 4Q20. Inflation risk has intensified. In the June ANZ Business Outlook survey, it’s shown that 84% (pricing intention) of retailers intended to increase prices. Inflation expectations also reached +2.41%, significantly above RBNZ’s target range midpoint of 2%. The job market has also improved. Westpac’s quarterly Employment Confidence Index gained +4.4 points to 103.9 in 2Q21 amidst expectations of more vacancy. As suggested in the accompanying report, “the most notable result from the June survey was a strong lift in perceptions about current job opportunities, which are now above pre-Covid levels”.