Key points
As widely expected, the RBNZ left the official cash rate (OCR) unchanged at 5.75% when it released its quarterly
Monetary Policy Statement.
Governor Brash described the current level of the OCR as ‘around neutral’.
The market perceived the Statement as relatively hawkish, with the RBNZ focusing on the strength of the domestic
economy and upside inflation risks.
The Bank’s central forecast scenario includes a modest first re-tightening in early 2002.
However, the door for a further easing in the near term was left open, with the RBNZ pointing to the risk of trading
partner growth continuing to disappoint.
An alternative scenario printed in the document showed the global output gap around 0.5ppt wider than in the central
scenario, which would be consistent with the OCR dropping 75bps below the central track. That would imply possible
further easing steps later this year and/or in early 2002.
The projected growth profile from here on has remained largely unchanged: 2½% in 2001/02, followed by 3% and 2½%
respectively during the two subsequent years.
The RBNZ lowered its assumption for annual growth of potential output to 2½% and assessed that the economy is
currently operating at around full capacity. The Bank estimates that, following flat March quarter GDP, the economy
rebounded by 0.8/0.9% qoq in Q2.
Consistent with buoyant domestic trading conditions, the RBNZ has revised up its 12 month inflation outlook by a small
amount (see chart below), but expects medium-term conditions to allow CPI inflation to fall back to the mid-point of the
0-3% target range.
The Bank points out, however, that there are upside inflation risks arising from tight capacity utilisation,
particularly in the labour market.
The assumption for wage inflation has been revised up by 0.5% for each of the next three years (to 4%, 3½% and 3%
respectively).
Fixed interest markets sold off following the statement. Bill futures weakened around 10 points, while bond yields
rose around 6 bps. The market is only pricing a 15% chance of a further easing this year.
The NZD did not react to the statement.
Our assessment
The RBNZ’s statement clearly reflected the divergent risks surrounding the central forecast scenario:
On the one hand, domestic inflation risks are considerable – particularly arising from the tight labour market - and
the Bank admitted in its write-up that its inflation projection could be seen as ‘unduly optimistic’.
On the other hand, the Bank again demonstrated its concern about the global growth outlook and the potential effect on
New Zealand, notwithstanding currently buoyant domestic trading conditions.
The alternative scenario printed in the Statement shows that it would not take a lot of additional weakness in global
growth to generate conditions, which, according to the RBNZ, would justify a further reduction in the OCR. Given the
latter, it is surprising that the market is pricing only a 15% chance of further easing steps later this year.
While the market has perceived today’s Monetary Policy Statement to be relatively hawkish, we are of the view that the
RBNZ has retained an easing bias for the near term. General uncertainty about the global outlook suggests that it would
not take very much to convince the market to revert to pricing higher probabilities of further rate cuts. For instance,
a string of weak US data or an unexpectedly ‘dovish’ statement by the Fed next week could be the trigger. Furthermore,
another downward revision to trading partner growth projections (latest Consensus forecasts will be released later this
week) could move conditions significantly towards the RBNZ’s alternative scenario.
While Deutsche Bank’s central view remains that the RBNZ’s easing cycle is finished and that a first re-tightening is
likely to occur in March, the risk remains that yields will go lower in the near term.
Ulf Schoefisch, Chief Economist, New Zealand