RBNZ to leave rates unchanged in pre-election MPS as inflation stays tame

Monday 8th September 2014

The Reserve Bank of New Zealand will probably keep its key interest rate unchanged in a policy review that comes nine days before the general election, with consumer prices tame enough for the bank to trim its outlook for inflation and rates.

The central bank will keep the official cash rate at 3.5 percent on Thursday, according to a Reuters survey, and isn’t expected to hike again this year after saying in July that a “period of assessment” was needed.

The Reserve Bank’s survey of expectations last month showed businesses see a slower pace of inflation in the next two years as economic growth comes off the boil. Quotable Value data shows property values rose at the slowest pace in 14 months in August, while dairy prices in the GlobalDairyTrade auction have fallen 44 percent from their February peak.

Against that, net migration is surging and the kiwi dollar has fallen below the track expected by the Reserve Bank on a trade-weighted basis - a weaker currency tends to drive up prices of imports. Fixed-rate home mortgage rates have fallen from their highest levels in almost three years, according to interest.co.nz, which could re-ignite the property market.

“Having signalled a pause in July, and the data-flow since being supportive of such a move, the RBNZ is almost certain to leave the OCR unchanged at 3.5 percent,” said Robin Clements, senior economist at UBS New Zealand. “We expect there to be uncertainty as to the length of the 'period of assessment' but that it is still expected that rates will need to 'adjust further towards a more-neutral level'.”

The central bank is likely to assume the status quo in terms of the election on Sept. 20 and is typically cautious not to be caught up in the politics, although there is a risk of a centre-left coalition that could well change the outlook for the economy and interest rates.

“At this juncture firm commitments and bold forecasts are best avoided in favour of a softly-softly approach,” said Dominick Stephens, chief economist at Westpac Banking Corp. “The best course available to the RBNZ is to ‘kick the can down the road’ until the election has passed. The RBNZ can tackle the market head-on in December, if the data still warrants.”

The trade-weighted index was at 79.01 Monday morning in Wellington, which is below the 79.7 average level the central bank forecast for the third quarter in the June monetary policy statement.

Governor Graeme Wheeler may lower the track of the currency over the forecast horizon and soften his rhetoric, having said in July that the kiwi was “unjustified and unsustainable and there is potential for a significant fall” given it hadn’t adjusted to falling commodity prices.

He’s also expected to trim the track for the 90-day bank bills, in keeping with an OCR tightening cycle that may not be as far or fast as earlier thought. In June, the bank forecast the 90-day bank bills reaching 4 percent in the fourth quarter and 4.7 percent 12 months further out.

In late July, Fonterra cut its farmgate milk price forecast for the 2014/2015 season to $6 a kilogram of milk solids from a previous forecast of $7 kgMS. Since then the GDT price index dropped 6 percent to the lowest since July 2012 in last week's GlobalDairyTrade auction.

Economists at ANZ New Zealand last week cut their forecast for 2014/15 to $5.25 kgMS, that would amount to about a $5.1 billion hit to dairy revenue, or 2.2 percent of gross domestic product.

BusinessDesk.co.nz

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