RBNZ comfortable with economic projections as housing, Trump weigh on outlook

Thursday 2nd March 2017

The Reserve Bank is comfortable with economic projections underpinning its bias to keep the official cash rate on hold until the middle of 2019, although the local housing market and US President Donald Trump's trade ambitions could throw a spanner in the works, governor Graeme Wheeler says.

Speaking to a Craigs Investment Partners' investor day in Auckland, Wheeler reiterated the risks to the central bank's outlook outlined in the first policy review of the year in February. New Zealand's economy is in a purple patch, with levels of economic and employment growth well ahead of the country's 30-year average, and the bank sees the risks evenly balanced in respect to the OCR, which could go either up or down from its 1.75 percent level depending on whether there was an unexpected shock.

Wheeler said the balance of risks from the global economy - chief of which is whether Trump will pursue an 'America First' trade strategy - are to the downside, whereas the local economy held upside risks if migration and commodity prices came out ahead of forecast.

"We remain comfortable with our economic projections," Wheeler said in speech notes. "Given the external and domestic risks in respect of output and inflation, we consider the risks evenly balanced in respect of the OCR."

The speech treads over the same ground Wheeler and his deputies covered last month in highlighting the uncertainty of Trump's trade protectionism, which could warrant a faster pace of interest rate hikes by the US Federal Reserve, which would bolster demand for the greenback and increase the cost of New Zealand's imported goods. Similarly, it highlights the bank's uncertainties about the housing market, which has shown early signs of moderation but still suffers from structural issues such as a shortage of housing in Auckland.

Wheeler said there were several sources of uncertainty in the global economy, including the European growth outlook, Trump's trade policies, and China's expanding corporate debt, of which the US was the biggest unknown.

"There is much uncertainty around the objectives of trade policy under the new US administration, and the specific policy instruments that will be used in pursuit of these goals," Wheeler said. "However, some lines seem clear. The US administration withdrew from the Trans Pacific Partnership, the negotiations around the Transatlantic Trade and Investment Partnership between the EU and US are in jeopardy, and the administration has signalled it wants to renegotiate the North America Free Trade Agreement."

International media yesterday reported the White House intends to send a report to Congress this week which will signal a new trade policy that would ignore certain rulings by the World Trade Organisation if they were deemed to be undermining US sovereignty, and suggested the world's biggest economy could impose tariffs on countries thought to be operating unfair trade practices.

Wheeler also talked about the local housing market as being a major risk due to New Zealand's low interest rates and strong migration, while acknowledging house price inflation has "moderated substantially in recent months".

Still, it was "too early to say whether this moderation will continue, but future developments in respect of housing market imbalances and debt servicing costs are likely to be important influences on household spending and the level of aggregate demand in the economy," he said.

BusinessDesk.co.nz

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