As was universally expected the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 1.75% today.
We wouldn’t have been surprised if the Bank had moved its projection of the first tightening forward a touch reflecting recent inflation developments. However they have concluded in their Statement today that developments since their last MPS in February have been neutral for monetary policy and that “monetary policy will be accommodative for a considerable period”.
We always thought the Bank would “look through” the recent March inflation spike. They are clearly of the view that the upside surprise was entirely due to transitory factors – in fact their one-year-ahead headline CPI forecast is now LOWER than they were projecting in February.
The RBNZ sees inflation settling back at around 2.0% in time, and they have revised up their tradeables inflation reflecting the weaker exchange rate since February. However, they have revised down their outlook for non-tradeables (i.e. domestic) inflation. The RBNZ clearly sees the surprisingly weak GDP out-turn for the December quarter as more than just due to timing factors. We have some sympathy for that view, in fact our GDP forecasts remain lower than the Bank’s.
The upshot is conditions are not yet in place for the RBNZ to be concerned about a sustained rise in core inflation. Indeed wage inflation remains subdued with the Labour Cost Index, if anything trending down recently and the RBNZ’s preferred measure of core inflation (from its sectoral factor model) flat-lining in sympathy at around 1.5%, well short of the 2.0% mid-point of the target band.
So with their medium-term inflation projections unchanged they also have a set of interest rate projections that continues to flag no need for tightening for a considerable time. For the RBNZ that continues to mean late 2019. We’d still be surprised if we could get that far out without a tweak higher in the OCR. We continue to expect a first hike in May next year, but acknowledge considerable uncertainty in that projection.
Today’s benign Statement also probably reflects the Bank is getting what its wants right now. The New Zealand dollar is heading lower and retail lending rates are already heading higher, taking some heat out of the housing market. No need to upset the apple cart.
In terms of our asset allocation positions there are no implications in this release today. We remain of the view that global bond yields will continue to trend higher and New Zealand yields will head higher too, but are likely to out-perform the global market. We are underweight both fixed income sectors but with a larger position in global fixed. We are also overweight foreign currency so our portfolios are benefitting from a weaker New Zealand dollar.
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