RBNZ punchy on inflation outlook

RBNZ punchy on inflation outlook, but acknowledges global growth risks

(See attached file: RBNZ_dec_MPS.pdf)

The RBNZ today left the official cash rate (OCR) unchanged at 8.25%, as expected by all 16 market economists surveyed by Bloomberg. The rhetoric delivered by the central bank was, however, more punchy on the inflation front; with likely personal tax cuts, rising oil prices and emissions trading, all adding to the near term inflation trajectory. On balance, the statement was slightly more hawkish than expected, with the noted risks to higher inflation clearly outweighing the downside risks associated with a deteriorating housing market and concerns over growth in key trading partners. This is a central bank that has been at war with inflation since early 2004, and the chance of a rate cut is still a long way off.

One key point of note from the statement was the exclusion of a scenario analysis around the 90 day interest rate track. In the September MPS there was both an upside and downside scenario reflecting the risks associated with a higher than forecast inflation trajectory, and the downside risks to global growth from the financial market turmoil. The December statement has no such scenarios, just a flatline forecast; this suggests the risks have not changed since September. From the RBNZ's commentary, there is still an upside scenario to inflation, and a downside scenario from the global financial markets turbulence (see charts below).

As a result of the government's promised personal tax cut package, plus higher oil and food prices, and the new emissions trading scheme (which commences in stages from 2008) interest rates are now forecast by the RBNZ to remain at current levels for longer. JPMorgan maintains its forecast that the RBNZ will keep the OCR unchanged at 8.25% for the foreseeable future - with little to no chance of a rate cut until 2009. Given today's commentary, the risk of a further tightening in this cycle has increased to 25-30%.

"Overall, inflationary pressures have increased, and interest rates are now likely to remain around current levels for longer than previously thought. We believe that the current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent on average over the medium term, based on the information to hand at present."

Link to statement: http://www.rbnz.govt.nz/monpol/statements/3187194.html

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