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RBNZ Monetary Policy Decision Preview - November 2017

RBNZ OCR Review and Monetary Policy Statement due on Wednesday 8th November 2017 at 2000 GMT, 1400 CT

  • The RBNZ is likely to leave its Official Cash Rate unchanged at 1.75%
  • Uncertainty is rife following the recent General Election, which saw a new coalition come in to power
  • As a result, few expect anything too concrete from the central bank this time out

All 19 analysts surveyed by Reuters expect the Reserve Bank of New Zealand (RBNZ) to leave its Official Cash Rate (OCR) unchanged at 1.75%, and once again, focus will fall on the central bank’s economic projections and guidance.

The quarterly Monetary Policy Statement will also be released, with the key projections from August’s Statement available below.

The consensus expects the RBNZ to note that “numerous uncertainties remain.” Economic developments in lieu of the most recent monetary policy decision have been somewhat mixed. The global economic backdrop remains solid, inflation has ticked up and the domestic labour market continues to tighten, although political uncertainty remains elevated, the NZD is lower, forward growth indicators have softened and the housing market has cooled slightly.

Outside of the monetary policy sphere, the newly instated left-leaning ruling party has shifted the outlook for fiscal policy, which could have a notable impact on inflation.

It is also worth noting that the government is planning a two-phase review of the Reserve Bank. Phase one involves giving the Reserve Bank a dual mandate of employment and inflation, as well as introducing a committee for making monetary policy decisions.

The second phase is broader, while details are scarce, we know that macroprudential policy will be up for review. We also know that the government has no desire to include the exchange rate in the review, and various ministers – including the new Prime Minister herself – have indicated that they believe the recent fall in the value of the NZD is nothing to worry about.

The government intends to complete the review by March, when a new Reserve Bank Governor will be appointed.

The considerable amount of uncertainty around both the fiscal matters and the review of the RBNZ should lead to a fairly dull statement which is light on detail, buying the central bank more time until further clarity is available.

What The Bank Desks Are Saying

ASB: The RBNZ is facing an outlook of many moving parts, with uncertainties remaining over the policy outlook which makes November an awkward time to deliver a set of forecasts. The change in Government will bring a range of new policies that will likely tweak the economic outlook. But it is too soon for the RBNZ to properly assess the economic and inflation impacts. Furthermore, the incoming Government also has announced a review of the RBNZ Act and Policy Targets Agreement. Meanwhile, economic developments have continued in a similar vein this year, with near- term inflation lifting but growth proving a bit softer than expected. Given the messy outlook, the RBNZ is best to keep the policy assessment similar to previous statements; emphasise that interest rates will remain low for a prolonged period and highlight the many uncertainties on the outlook. We expect the Monetary Policy Statement to provide a high-level discussion on potential impacts of various polices to communicate their likely monetary policy implications. Doing so would give the market a steer on the thought processes the RBNZ would follow. The key areas that will have an impact on the inflation outlook include the degree of fiscal stimulus, immigration policy changes, housing policy changes, a likely Auckland fuel tax, and the proposed lift to the minimum wage.

ANZ: We expect the OCR to be held at 1.75%, with a cautious and watchful stance to be maintained. When we look at what has changed since the September OCR Review (increased policy uncertainty, lower NZD, softer forward growth indicators, weaker housing market, higher inflation, and a solid global backdrop), it is far from a clear-cut picture. Developments have been mixed to say the least, no doubt leaving the RBNZ with the view that “numerous uncertainties remain”. While changes to the fiscal policy landscape and some policy settings (i.e. industrial relations) present the most obvious factors that could alter the outlook for inflation, such changes are only potential at present and we don’t have detail. There will be some changes in the RBNZ’s forecasts. The RBNZ already hinted in September that it would tweak its growth forecasts lower, and we expect the sequential pace to be lowered from 0.9-1.0% q/q towards perhaps 0.8% q/q – at least in the near term. And we think its projected drop in inflation to 0.7% y/y in Q1 2018 is now looking unrealistic given the higher starting point, lower NZD and perhaps even what we have learned on the government policy front. A trough slightly above 1% is now more likely. However, we expect the changes to its interest rate projection to be small, if any.

BNZ: It is our strong view that the RBNZ needs to adopt a formal tightening bias. It should probably back this up by moving its first published tightening forward from December 2019 to earlier in the year. But while we would strongly recommend this course of action we would not be especially critical of the Bank if it, instead, hid behind the wall of confusion that currently surrounds it for a while longer. To us the confusion lies with the detail of upcoming policy changes that the new government will implement. We all know the broad tspanust of the changes but, at this stage, need a bit more detail on timing and specifics before including such change into our models. Moreover, incorporating change can take a fair few person-hours of analysis and the folk at the RBNZ really haven’t had that much time available to them. While the lack of detail may add to forecast confusion, the Bank does know the broad tspanust of policy and will be keen to take a stab at its implications as soon as possible so don’t be surprised if some effort is made to either explicitly include some policy changes or, at the least, talk of the risks of such to the Bank’s central forecasts. We do not buy, however, the argument that the RBNZ would sit on its hands because it doesn’t yet know the exact detail of the future Policy Targets Agreement or, indeed the Reserve Bank Act. However, we do acknowledge the extremely difficult operating environment in which the RBNZ is operating and would not be completely surprised if it displayed a degree of caution in its attempt to come to grips with this transitional phase.

HSBC: We expect the RBNZ to keep its cash rate on hold at 1.75%. However, we think the central bank may raise its own inflation forecasts, driven by the likely effect of recently announced fiscal stimulus, a cut-back in migration, the recent fall in the NZD and the recent upside surprise in the Q3 CPI. We see the RBNZ lifting its cash rate in Q3 2018.

RBC: Another steady rate decision amid considerable uncertainty over possible changes to the RBNZ’s mandate under the new Labour Government will be delivered next week. Key inflation and employment data have been firmer and may see a small lift to forecasts, while the currency tracked slightly below the RB’s forecasts for Q3 and is currently well below its Q4 forecasts (almost 5%). Despite this, we suspect that the bill track will remain unchanged, implying a steady cash rate of 1.75% until well into 2019 given the uncertainty coupled with a new Governor taking the helm in March 2018.

TD Securities: Consensus expects unchanged 1.75% OCR tspanough to mid- 2018. This is Spencer’s second OCR review but first MPS, and we look for a shift in rhetoric to suggest that the next move for the OCR is up. We look for a quarter-point upgrade to the Bank’s inflation forecasts across the forward estimates to justify this hawkish stance.

Westpac: We expect the RBNZ to keep the OCR on hold and give the same neutral policy guidance that it has given all year. We also expect the OCR forecast to be the same as the August MPS – flat until late 2019 and slowly rising beyond that. The economic outlook has deteriorated, and the housing market is weaker than the RBNZ anticipated. But the exchange rate has fallen sharply, meaning the overall outlook for medium term inflation is broadly unchanged. Furthermore, the change of Government makes the economic outlook more uncertain. The RBNZ is better off waiting and seeing how Government policy evolves, rather than making bold changes at this point. There would be very little financial market reaction to a neutral MPS along these lines.
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