New Zealand: RBNZ September MPS – RBNZ keeps door open for hikes

• The Reserve Bank of New Zealand (RBNZ) left the Overnight Cash Rate (OCR) unchanged at 2.50%, in line with the consensus forecast and market pricing.

• The Statement was more dovish than the June MPS, in line with our expectations (see New Zealand: RBNZ September MPS – Not that dovish, 14 September 2011). Governor Bollard noted the recent deterioration in the global growth outlook as a key downside risk and highlighted the dampening effect of the high NZD.

• Revisions to inflation and, importantly, the 90-day interest rate track were small and more upbeat than market pricing suggested prior to the meeting, in our view. The RBNZ noted that the NZ economy is continuing to show signs of strength, with domestic economic activity surprising on the upside and capacity usage appearing to have increased. Bollard noted that “if recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase.”

• However, the market concentrated on the dovish tone of the Statement and the downward revisions to 2012 GDP (due in part to delays in the Christchurch rebuild). As such, the NZD/USD has depreciated around 0.5% since the Statement while AUD/NZD has gained 0.3%.

• We maintain our expectation that the RBNZ will hike rates by 50bp at its December meeting.

Figure 1: RBNZ MPS forecasts

Key details

• The RBNZ noted the recent deterioration in the global outlook and the “real risk that global economic activity slows sharply” (Figure 1). In addition, it highlighted the continued strength in the NZD TWI, which is “having a dampening influence on some parts of the tradable sector and on imported inflation.”

• The RBNZ said that because of delays in the rebuilding of Christchurch it was “unlikely that construction sector activity will pick up as soon as was projected in the June Statement.” This contributed to sizeable revisions in GDP growth of around 0.8-1 percentage point over the next 1-2 years.

• The RBNZ’s revision to its 90-day interest rate track was very modest relative to what the market was pricing in. Specifically, it revised down its Q1 2012 forecast to 3.1% from 3.4% and its Q1 2014 end-point to 4.3% from 4.9%, well above the 3.8% implied by market pricing prior to the decision (Figure 2).

• This was underpinned by a modest upward revision to its inflation forecast and a sharp revision higher to export growth reflecting “very favourable climatic conditions in 2011.” The RBNZ acknowledged the recent strength in domestic data and cited several factors which will support growth going forward. We have noted many of these factors, including high export prices, the Rugby World Cup and the Christchurch earthquake rebuild.

Figure 2: RBNZ 90-day interest rate forecasts vs. implied market pricing prior the Statement

Looking ahead

We expect global macro conditions to stabilise and the RBNZ to re-focus on the domestic recovery and persistent inflationary pressures. We expect the RBNZ to hike its policy rate by 50bp at the December MPS meeting, reversing the emergency 50bp cut imposed after the Christchurch earthquake earlier this year (Figure 3). With the market pricing only around 10bp of hikes by end-year, we see room for NZD/USD upside and AUD/NZD downside to extend further.

Figure 3: RBNZ policy rate – Barclays forecast

Source: Barclays Capital.

Link to full Statement – http://www.rbnz.govt.nz/monpol/statements/sep11.pdf

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