RBNZ Affirmed the Next Move Can be Up Or Down, Despite Upbeat Data

RBNZ left the OCR unchanged at 1.75% in November. The move had been widely anticipated. Despite recent strong dataflow, the central bank downplayed the improvements and Governor Adrian Orr affirmed that the next rate change can be up or down. Kiwi, which has jumped to the highest level in 3 months against US dollar after the upbeat employment report, remains firm after the announcement.

Recent macroeconomic developments have been robust. GDP growth picked up to +1% in 2Q18, up from +0.5% a quarter ago. On year-over-year basis, GDP expanded +2.7%. Growth was broadly based, with 15 out of the 16 industries contributing to the largest quarter-on-quarter increase in two years. Unemployment rate fell to 3.9%, the lowest since June 2008, in 3Q18, from a revised 4.4% in the prior quarter. This also beat consensus of an uptick to 4.5%. Meanwhile, the participation rate rose to a record 71.1%, suggesting higher confidence in the employment market. Headline CPI accelerated to 0.9% q/q in 2Q18, compared with consensus of +0.75 and 2Q18’s 0.4%. From a year ago, inflation accelerated to +1.9%, up from +1.5% in 2Q18. However, the headline reading was mainly lifted by the strong increase in petrol price. According to NZ Stat. petrol price contributed about 30% to the quarterly CPI movement for September, and about 40% to the annual movement.”

RBNZ downplayed these developments. In the accompanying statement, it removed the reference that interest “rates could move up or down” in the next monetary policy decision. While this sounds hawkish in first sight, the governor affirmed that he is “not taking rate cut off the table” and the policy rate would stay at an expansionary level for some time. The central bank attributed the strong growth in the second quarter to “temporary factors” and cited business surveys’ expectations of softer growth ahead in the near term. It expects growth to pick up next year, with the help of monetary stimulus and government spending. It also noted that a weaker NZD would help support export earnings.

RBNZ acknowledged the strong employment situation. Yet, it is more concerned about core inflation, which has remained below the 2% target mid-point. It signaled the need of “continued supportive monetary policy”. As suggested in the accompanying statement, higher fuel prices would remain an upside risk to near-term headline inflation. As such it has revised the headline inflation estimates over the forecast horizon. Looking through this effect, RBA expected “limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target”.

In short, RBNZ judged that it is appropriate to stay cautious amidst the upside risk to temporary inflation and downside risk to growth have affirmed. It is likely that it would not adjust the policy rate until late 2020.