RBNZ left rates steady, but commentary more dovish

RBNZ left rates steady, but commentary more dovish

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The RBNZ left the official cash rate (OCR) at a record low 2.5% this morning, as expected. Although the statement was slightly more dovish than the previous statement, Governor Bollard reiterated that the policy stimulus may be removed “around the middle of 2010”, providing the economy continues to recover in line with the Bank’s forecasts. This appears to be the case, with the Governor stating today that the “economy is recovering broadly as expected and growth is predicted to pick-up further through 2010.”

Unlike in the previous statement in January, the RBNZ did highlight today that higher bank funding costs are doing some of the heavy lifting on the policy front. In the MPS today, the Bank noted that the marginal cost of funds is around 150bp above the OCR. This, though, has not changed our view that the RBNZ will kick off the next tightening cycle in July with a 50bp hike. Bollard has said that the OCR didn’t come down in 25bp hops, so when he is confident the recovery is sustainable there could be some “meaty chunks” on the upside. Those “meaty chunks” will not, however, match the 100bp or 150bp moves we saw on the way down given that elevated bank funding costs are reducing the extent of future increases in the OCR. That said, we still expect a 50bp hike at the start of the next tightening cycle, particularly given the OCR remains at record lows.

That 50bp hike to the OCR will, on our forecast, be delivered in July, given that Governor Bollard appears to want hard evidence that the recovery is sustainable. We believe the RBNZ will sit on the policy sidelines until after the late-June release of the 1Q GDP report. The 4Q09 and 1Q10 GDP numbers should be relatively healthy, however, much stronger than that in previous quarters. The RBNZ expects quarterly GDP growth of 0.6% in 4Q09 and 0.9% in 1Q10, compared to our forecast for growth of 0.6% and 0.8%, respectively.

On the domestic front, Dr. Bollard highlighted that consumer confidence and household spending have improved, although households remain cautious. Business spending and credit growth, meanwhile, remain subdued. Indeed, in on-year-ago terms, growth in business lending is negative, lending to the agricultural sector has slipped back into single digit territory, consumer lending has fallen for 11 straight months, and housing credit growth has remained stable with a 3%-handle despite the spike in housing activity toward the end of 2009.

On the latter, the statement today made a point of highlighting that house sales remain subdued, which will ease the RBNZ’s concerns about the potential reemergence of debt-fueled housing excesses. The pickup in house prices toward the end of 2009 was remarkably strong, but gains since then have tapered off, and house sales recently slumped to an 18-year low. In the Monetary Policy Statement (MPS) that accompanied today’s announcement, the RBNZ highlighted that potential changes to the taxation of property may also weigh on house prices in the medium term.

Risks around the global outlook have increased, according to Bollard, but trading partner growth has recovered “a little faster than expected,” with growth strongest in China, Australia, and emerging Asia. The statement was a little more dovish with respect to growth in other trading partners, though, which the RBNZ says is “more muted.”

The RBNZ remains comfortable with the inflation outlook, with annual CPI inflation set to track within the Bank’s 1%-3% target range over the medium term, although there may be some upward pressure on headline inflation in the short-term, owing to the implementation of the amended Emissions Trading Scheme and increases in Accident Compensation Charges (ACC) charges. The RBNZ, however, appears willing to look through these temporary factors We believe, though, that inflationary pressures will become a growing concern in the latter months of the year, as domestic prices rise and excess capacity continues to diminish.

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ENDS

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