New Zealand’s recovery ‘less fragile’

Australia Economic Research

RBNZ's Bollard says New Zealand’s recovery ‘less fragile’

 
 
Reserve Bank Governor Alan Bollard this morning spoke on the outlook for the New Zealand economy in Dunedin. Financial markets interpreted the speech as being a little hawkish, with market pricing shortly after the speech suggesting a 72% chance of a rate hike at the next official cash rate (OCR) announcement in June, compared to 68% previously. We believe, though, that the speech simply was an expansion on the bank’s statement on April 29, when the RBNZ left the cash rate at a record low 2.5% and signaled that the policy stimulus may be removed “in coming months.” As such, Dr. Bollard today maintained the flexibility acquired in the statement, which will allow the policy stimulus to be removed when economic conditions are appropriate.

Last Thursday, Dr. Bollard changed the official guidance on coming policy normalization, dropping the reference to a planned removal of policy stimulus “around the middle of 2010” and replacing it with a more flexible phrase suggesting that the stimulus may be removed “in coming months.” This we interpreted as meaning a June or July move or, possibly even later. The new language can be rolled over from month to month should economic conditions deteriorate.

Key to the Governor’s speech today, however, was his “truck driver” analogy:
“Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going. Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for the some time.”

Indeed, this implies that the RBNZ is readying to remove the policy stimulus, but exactly when the truck driver will decide to “reduce acceleration” will depend on how the economic data evolves. If the economic data continues to evolve in the remarkably positive fashion of today’s employment numbers (analysis to follow), a June rate hike will be delivered. That said, the Governor reiterated this morning that conditions on the domestic front remain fragile, with a significant element of caution among businesses, which have no significant plans to invest or rehire. For the household sector, he acknowledged the “soft” pick-up in house prices, new building, and sales. The forthcoming data on retail sales, house prices, and inflation expectations, in particular, and of course the May 20 Budget will, therefore, be key to the June policy decision.

We acknowledge the risk on a June move, particularly following this morning’s very strong employment report (which showed the largest drop in the unemployment rate since 1986), should the economic data prints firmly ahead of the decision. The June OCR announcement will be accompanied by the Monetary Policy Statement, which will allow the RBNZ move ability to convey its outlook on the economy and inflation. That said, we still think that a July move is more likely. By then, the RBNZ should have another healthy GDP print in hand (we are forecasting 1Q GDP growth of 0.8%q/q, matching the solid increase in 4Q), and the case for keeping the cash rate at historic lows should have weakened substantially.
 

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