RBNZ to remove policy stimulus over coming months

RBNZ to remove policy stimulus over "coming months"

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The RBNZ left the official cash rate (OCR) at a record low 2.5% this morning, as expected. While market economists were unanimous in their anticipation that the RBNZ would leave policy on hold today, the accompanying statement did offer some new verbiage to mull over. Given the softening on the official data front in recent weeks, in particular, after the benign 1Q inflation print (which came in below market expectations at 0.4%q/q), we had expected that the statement would drop the explicit reference to a planned removal of policy stimulus “around the middle of 2010”. This was indeed the case in today’s statement – that phrase was jettisoned in favour of the similarly opaque “in coming months”.

While it is tempting to speculate on what this new phrasing means for the timing of the first rate hike, we are reluctant to claim that the change represents anything substantive in terms of when the RBNZ privately expects to kick-off the hiking cycle. None theless, there are two significant aspects to this change in rhetoric. First, the fact that the language has been changed at all does, at the least, indicate that officials are less certain of the stability of the domestic recovery than they had envisaged they would be approaching mid-year. This, of course, reflects the recent run of softer domestic data. Second, the new language is atemporal, i.e., it can be continuously rolled over from month to month, if the recovery fails to take hold. The fact that the RBNZ is allowing itself the flexibility to defer hiking rates in this manner, we believe, adds a slightly more dovish tone compared to the previous statement.

The domestic economy, according to RBNZ Governor Bollard, is, as in previous statements, still “recovering broadly as expected and growth is predicted to pick up further through 2010.” Similarly, the tone of the references to specific sectors was broadly unchanged in sum, though the emphasis has shifted slightly to a more export-led recovery. In the today’s policy assessment, Bollard stated that “households remain cautious, with the housing market and household credit growth subdued”. This somber note was tempered with the clause “notwithstanding the impact of stronger than expected export earnings”. In the previous statement, the balancing reference was instead the fact that “stimulus and improved consumer confidence have seen a pick-up in household spending”. Business spending, on the other hand, as in last month’s statement, is weak. Clearly the burden of growth has shifted further toward the external sector in the eyes of Dr Bollard.

It seems RBNZ officials are comfortable that this shift to a more export-led recovery will be sufficient to overcome still sluggish domestic demand. Growth in Asia was described as “particularly strong”, and “trading partner activity has recovered more quickly than expected”. Indeed, the compelling evidence of a strong cyclical lift in Asia appears to be behind Dr Bollard’s assertion today that “On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection.” There were no substantive changes to the outlook for inflation, which the RBNZ expects to track within the target range over the medium term. The temporary upward distortions created by the ETS and ACC charges, which rated a mention in the March statement, were absent today, however.

We continue to expect that the RBNZ will begin the normalization of policy with a 25bp hike at the July meeting. Of course, there have been false starts to the recovery so far, which officials are clearly wary of, and there are other elements doing some heavy lifting for the Bank, including “an increasing wedge between the OCR and lending rates”, and a steeper yield curve, which Deputy Governor Grant Spencer told an investor conference last month would make monetary policy a sharper implement. These factors, though, are arguments for a more gradual normalization of policy, rather than a substantially delayed one. By July, the RBNZ will have two healthy GDP prints in hand, after the solid 0.8%q/q result in 4Q and our forecast for another 0.8% rise in 1Q. By then, the case for keeping the cash rate at historic lows will have weakened substantially.

ENDS

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