First impressions of the RBNZ’s February Monetary Policy Statement.
In its first review of 2019, the Reserve Bank left the OCR at 1.75% as expected. The tone of the statement was more dovish compared to November, but it didn’t go quite as far in that direction as we or markets were expecting.
The projected OCR track was around 20 basis points lower, with the RBNZ noting that it expects to keep the OCR at its current level over the next two years. The comment that “the next OCR move could be up or down” was returned to the statement, having been removed from the November statement after a run of strong data.
These headlines were all very much in line with our expectations, but some of the details were less dovish than we might have expected. Overall, the RBNZ has stuck to its view that inflation pressures in New Zealand are slowly building.
The RBNZ’s downside concerns centred around the global economy and were couched as risks. In contrast, the RBNZ remains upbeat on domestic conditions, with growth expected to be supported by low interest rates, government spending and investment, and growth in employment.
The tight labour market in particular featured strongly in the RBNZ’s analysis. The RBNZ noted that while it estimates the current output gap to be zero, its conversations with businesses point to difficulties in finding workers and pressure to pass on cost increases.
Inflation was forecast to slow to 1.4% in 2019, with the recent plunge in fuel prices acting as a drag. Inflation is expected to rise to around 2% over the medium term, a bit lower than their previous forecast.
There was no mention in the media release of the higher exchange rate since November, which is a little surprising given that it was trading significantly higher than their previous forecast.
Finally, we note that some of the details of this statement seem out of date. Export commodity prices are described as having “already softened”, but in fact they have seen some significant gains recently. The RBNZ expects GDP growth to rebound to 0.8% in the December quarter, but recent indicators point to something much weaker. And the recent revisions to the net migration data have yet to be incorporated into the RBNZ’s forecasts. Altogether, this suggests that some downside revisions to the RBNZ’s views may be already in the pipeline.
Financial markets have been moving towards pricing in the possibility of an OCR cut by the end of this year. Today’s statement didn’t do much to endorse that view. Consequently, the New Zealand dollar rose by 0.7 cents to 0.6800 and swap rates rose by 4 basis points.
More details to follow in our Bulletin later today.n.
