The Reserve Bank of New Zealand surprised me (and nearly everyone else) with its dovish lurch in March. To be fair, the RBNZ has been leaning in that direction for a while. In most of its recent alternative scenario modelling they have shown a likely more aggressive response should downside inflation risks manifest than if upside inflation risks came to pass.
The adoption of a formal easing bias in March seems to have been precipitated by the renewed concerns about global growth that had been brewing since late last year. It was also a nod to weak domestic business confidence.
And of course this was happening at a time when GDP growth is clearly past the peak in the cycle and inflation has still not really fired. In fact, the RBNZ’s key measure of core inflation, while off the lows, appears stuck at 1.7%, just below the midpoint of their 1-3% target band.
So come March, one of the key risks for the RBNZ was that offshore central banks would turn dovish and potentially ease conditions, which would have implications for the New Zealand dollar and the domestic inflation outlook.
Since then we’ve seen 'green shoots' out of the global economy, importantly in China. That has alleviated some of the concern around global growth. Furthermore, while the US Federal Reserve has recently reinforced its comfort and ongoing patience with current monetary policy settings, it has also signalled the likelihood of an imminent rate cut is low. We concur. That has removed some of the upside risk for the NZ dollar.
However, we are still in the situation of the RBNZ having adopted an easing bias, the onus is on the data to prove that a cut isn’t warranted. And there the evidence is, at best, mixed. The recent March quarter CPI was soft (though mostly for tradeable rather than non-tradeable factors), business confidence has stabilised (though not improved) and GDP growth has disappointed.
Last week’s labour market data had something for everyone, though there were more negatives than positives. Employment went backwards (not unusual when the labour market is tight and skill shortages rising), wage growth stayed subdued (which IS unusual for a tight labour market), while the unemployment rate dropped slightly.
So where does that leave us for the Monetary Policy Statement for this week? It seems to us that given the easing bias and the fact the data isn’t saying not to, a rate cut seems more likely than not. That may come as early as this week.
My reluctance to call outright for a cut is that I don’t think it will make difference to the growth and inflation outlook.
Regular readers of our research will know that we think that much of the recent slowdown in growth has been due to supply constraints rather than deficient demand. And while that hasn’t yet been reflected in inflation, it is in terms of profitability.
Furthermore, we think the global economy is fine and has just been through another soft patch reminiscent of 2012 and 2015, rather than the beginnings of a major and deep cyclical downturn.
Only time will tell, but given the uncertainty coupled with the fact that there is no immediate need to act, we think it prudent for the RBNZ to leave the OCR where it is this week, maintain its easing bias and reassess in August.
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