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HSBC: The RBNZ Observer: OCR on hold for a while yet

Publish By Updated 24/01/2012 2:03 pm in Business / no comments

  • Inflation has eased, with the underlying measures now around the middle of the RBNZ’s target zone
  • The global slowdown is starting to have an impact locally, with business confidence weakening
  • Rates to stay on hold this week, with the RBNZ expected to suggest it will be low for a while yet

Rates on hold

Global growth is slowing and New Zealand is not entirely immune. Slower growth in

New Zealand’s major trading partners in 2012 will impact on New Zealand’s local performance. However, it is worth keeping in mind that New Zealand’s largest export recipients are in Asia, with Australia the single-largest export market (together Asia and Australia account for over 60% of Kiwi exports). And while we expect that global growth will slow this year and that Q1 will be a ‘challenging’ time for Asia, we are still generally optimistic about the broader outlook for Asia.

We also expect that growth will rise solidly in Australia in 2012 as the mining boom rolls on and the Reserve Bank of Australia (RBA) provides further support for the interest-rate sensitive sectors of the Australian economy. Suffice to say, we still expect that growth in New Zealand’s major trading partners will be solid.

Importantly, rural commodity prices remain well supported by the continued emergence of the middle class in Asia, which is driving demand for meat and dairy products.

Locally, the New Zealand economy was held back in 2011 by the impact of the Canterbury earthquakes, and continued aftershocks have delayed reconstruction efforts.

More recently, concerns about global conditions have curtailed some rural investment plans, despite high levels of commodity prices. All the while, the household sector has continued to deleverage, which has kept housing prices steady and construction very weak. All of this has worked to keep the labour market fairly lacklustre and has been part of the reason why inflation has been contained.

However, we still see New Zealand’s prospects as better than some, with growth expected to rise this year as the reconstruction efforts in Canterbury ramp up in H2. Policy rates that are well below neutral will continue to support consumption and start to see some recovery in the housing market. For now though, with inflation contained, global growth slowing and rates already at very low levels, we see the Reserve Bank of New Zealand (RBNZ) remaining on hold. For now though, with inflation contained, global growth slowing and rates already at very low levels, we see the RBNZ remaining on hold.

Global downturn weakening confidence

The global financial turmoil has started to have an impact on local confidence. The PMI and PSI have both ticked down in recent months. The fall in the PMI to well-below-average levels partly reflects the effect of the previous appreciation in the exchange rate. The PSI has also fallen in recent months, though it remains above its breakeven level, implying continued growth. The broader measures of business sentiment are well below their recent peaks, though still in the territory that implies continued growth.

While the GDP numbers for Q4 are still expected to get support from the Rugby World Cup (which ran from mid-September to late-October), we expect that growth will ease around the turn of the year as the world cup’s effect fades and the global slowdown’s impact on confidence feeds through to activity.

We still expect growth to be higher this year than last year. This partly reflects that commodity prices have remained at elevated levels, which is supporting income levels and the trade surplus. The household sector is also getting some support from an easy monetary policy, although the labour market remains slow to recover.

Lower inflation gives RBNZ time

The milder-than-expected recovery, particularly in the labour market, has been one factor that has kept inflation contained. Underlying measures of inflation are currently tracking around the middle of the RBNZ’s target band.

With inflation well within its comfort zone, the RBNZ is under no pressure to lift rates any time soon. Indeed, the discussion may shift to whether there is scope to cut rates, if things turned for the worse. Our view remains that with rates at very low levels– 2.50% – the scope for cutting further is severely limited. A country with a large foreign funding requirement, such as New Zealand, would be hard pressed to lower rates too much further as it may hinder its ability to fund itself.

Late last year, the RBNZ dropped its references to the 2.50% cash rate as ‘emergency levels’, implying that rates may be at these levels for some time to come. We agree. We do not expect rate hikes to be back on the agenda until H2.



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