The RBNZ Observer: On hold, with a longer pause now expected
- Having delivered 100bp of hikes and with dairy prices falling, the RBNZ is expected to hold steady next week
- Timely indicators of business and consumer sentiment have stepped back from high levels, although inward migration
remains strong and the Canterbury rebuild is on-going
- Given some easing in conditions and the dairy price fall, we now expect the RBNZ to be on hold for the rest of this
year, with the next hike expected in Q1 2015 (previously Q4 2014)
The RBNZ has time on its side
The rate hikes are over for now. With 100bps of interest rate hikes delivered between March and July, the RBNZ made it
clear at the last meeting that it is on hold for the time being. And recent activity indicators suggest that some of the
shine has been taken off the economy’s boom – meaning an extended pause from the RBNZ looks prudent.
With a no-change decision widely anticipated, more interest will be focused on the tone of the Monetary Policy Statement
and the accompanying forecasts. Over the past few months, prices for key export commodities have continued to decline,
impacting incomes. At the same time, business and consumer sentiment have softened, as has the housing market – all
suggesting that higher interest rates are already restraining activity.
While the RBNZ’s forecasts may be a little softer that those published in June, they will almost certainly be more
hawkish than current market pricing. In June, the RBNZ’s forecasts implied an OCR of around 4.5% at end-2015, whereas
market pricing has now fallen to imply an OCR of only around 3.75% by that point.
We remain optimistic about New Zealand’s growth prospects. Even though indicators have moderated a little recently, they
remain at healthy levels overall and we still expect the economy to grow by +3.5% over 2014 and +3.0% over 2015. With
growth continuing to exceed potential, the economy’s spare capacity will likely diminish further and more inflationary
pressure is expected to be generated.
The key judgment for the RBNZ is just how much inflation will be generated and when. So far, despite strong economic
growth, inflation has been well-contained. The same is true of wages and forward-looking indicators of firms’ pricing
intentions. With the inflation outlook still benign, the RBNZ has time on its side. We now expect it to remain on hold
for the rest of 2014, before resuming a hiking stance in early 2015.