RBNZ Pleasingly Skirts a Dovish Tilt
- RBNZ leaves OCR at record low 1.75%
- And chary to the net-negative news since May
- NZD and wholesale rates little changed
- August MPS risks looking a little dovish
- But we leave our Feb hike call for now
- As capacity constraints pressure core inflation
As widely expected, the Reserve Bank of New Zealand left its policy interest rate unchanged at this morning’s OCR review, at a record low 1.75%. It also kept its language largely unchanged from last time. While we expected such a steady-as-she-goes approach, we did see a risk of the rhetoric tilting a fraction dovish, given the balance of news since the 11 May Monetary Policy Statement (MPS). But it didn’t, which we were pleased to see.
Outlook for Borrowers: Post June OCR Reveiew
- With expectations of unchanged monetary policy for some time, wholesale floating rates and short-dated wholesale fixed rates should remain fairly flat through the rest of the year. A slight upward bias prevails due to upward pressure on bank funding costs. Next year, the possibility of higher wholesale rates increases as the first expected policy tightening by the RBNZ approaches.
- For those looking to hedge against rising rates, we see current levels of mid-long curve wholesale fixed rates at relatively attractive levels to do so. Risks appeared skewed toward higher rates later in the year.
Back On Track
New Zealand’s services sector returned to its recent level of consistent and healthy expansion during May, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
New Zealand’s manufacturing sector saw expansion in activity lift during May, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Slow Q1 GDP Doesn't Deny Demand Pressure Developing
- Real Q1 GDP slows to 0.5%, 2.5% y/y
- Encouraging the view of RBNZ reservation
- But nominal GDP running at 6.2% y/y
- Just as capacity constraints begin to bite
- And we add demand to our GDP forecasts
- Pressure remains in view, in other words
We are not down in the mouth about today’s reported 0.5% expansion in March quarter GDP. Yes, it under-clubbed market expectations of a 0.7% gain and was even further below the Reserve Bank expectation of a 0.9% lift. That being said, we expected Q1 GDP to be this slow, largely on technical/timing issues. More to the point, we still think the economy is fundamentally pressing on, but as its room to expand is diminishing, because of capacity constraints. Budget measures will add to demand pressures.
For Better Or Worse?
- Current account deficit unexpectedly widens
- But external accounts remain benign
- As net international liability position continues to shrink
- Nominal income growth looks strong
- But we have reservations for tomorrow’s real GDP
- Cyclone fueled food prices nudge our Q2 CPI pick higher
The annual current account deficit for the year to March 2017 was 3.1% of GDP. This was a bigger deficit than the 2.7% figure both the market and we expected and a push wider from the (upwardly revised) 2.8% result for calendar 2016.
- Fiscal stimulus to boost growth
- But capacity constraints are binding
- Lack of land, labour, physical capacity and finance will strangle growth
- And, potentially, raise inflation
- We’re optimistic but warn against overly ebullient growth expectations
New Zealand’s economic environment is probably unique in the developed world. Whereas many nations continue to fend off the fallout from a protracted downturn, New Zealand, instead, is suffering from speed wobbles. A softening in economic growth looks almost inevitable but not because demand is set to weaken but rather because the economy is rapidly running out of the inputs required to keep the expansion on track.
High Terms of Trade Data Not Without Hooks
There is a strong positive income pulse brewing in the NZ economy, courtesy of rising export prices and relatively subdued import prices. But this, being price driven, will not show up directly in quarterly real GDP figures that might well look a bit softer in the near term. We expect the terms of trade to remain elevated compared to history, while we judge the near-term volume weakness to be transitory.
The Politics of a Buoyant Business Sector
- May's business survey another strong one
- With inflation firming up squarely
- All pre the Budget's announced stimulus
- But beware election nerves creeping in hence
- RBNZ FSR telling of low-rate context
If New Zealand’s business sector is getting nervous about September’s general election, there was little sign of it in today’s ANZ business survey. Yes, net confidence – even with its 5 point increase in May, to +15 – is barely different to average, having been well above trend late last year. However, most every indicator regarding activity wriggled up, to a level further above trend. And the survey’s inflation gauges were now pointing to inflation of 2%, at least.
Government Has A Lot to Do With Pressure
Today’s Budget had a lot to do with pressure. Pressure to funnel some of surpluses back into the economy (in an election year); the pressure this will put on the economy’s resources, especially construction; all amid the ongoing pressure from a strongly growing population.
Commodity Winds are Now Tail Ones to Trade
After a rough December quarter, New Zealand’s merchandise exports look to be rebounding quite well this year, while imports are largely maintaining their good momentum. So were the messages of this morning’s April trade account. And today’s milk price announcements by Fonterra were a further reminder that the commodity sector is now providing tailwinds to the economy, after cross-winds last year.
A Perfect Storm?
New Zealand’s services sector experienced a sudden drop in expansion levels during April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
While New Zealand’s manufacturing sector saw expansion in activity soften slightly in April, the sector remains in healthy territory, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
RBNZ Dismisses Inflationary Developments
We have witnessed rising inflation, rising inflation expectations, falling unemployment, a weakening currency and a strengthening global economy. We had thought this would rattle the Reserve Bank. As it turns out, it all seemed to have counted for little as the Bank left its stance unchanged from both its February and March missives.
New Zealand At A Glance
The New Zealand economy continues to perform well and we anticipate reasonable growth ahead. High immigration is playing a role but momentum is broad-based. Still, we believe the growth phase is broadly maturing/peaking.
Labour Market Still Booming in Everything But Wages
- Q1 labour market data generally strong
- But wage inflation still lagging, for now
- Nothing out of line with Feb MPS forecasts
- But next week's MPS all about the CPI track
- Hours affirm our caution around Q1 GDP
Will nominal wage inflation remain moderate, or is it bound to pick up? This is a key question for monetary policy, as we look to next week’s Monetary Policy Statement. In terms of activity there is no question that New Zealand’s labour market retains strong momentum, and is, at the margin, still tightening the screws. Be that as it may, wage and salary measures have not responded in their usual manner, or at least not quite.
Core Inflation More Than Apples
- Inflation highest since 2011
- Significantly higher than RBNZ forecasts
- Higher inflation doesn't look like an aberration to us
- Core measures push above 2%
- Questions how long OCR can stay at 1.75%
The key message from today’s consumer price inflation figures is that core inflation is rising and has poked above 2% on some measures. That is more important than the headline annual inflation rate jumping up to 2.2% in Q1, or the specifics around which prices rose this particular quarter. That said, higher headline inflation is relevant to the extent that it is likely to influence inflation expectations. Keep watch for indicators on the latter over coming months and quarters.
New Zealand’s services sector continued to show increased expansion during March, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
The PSI for March was 59.0. This was 0.3 points higher than February, and the second highest level of expansion over the last 18 months (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).
New Zealand’s manufacturing sector saw activity increase further in March, with new orders leading the way, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Inflation Not All Meat and Vege
- QSBO intimates CPI inflation headed over 2.0%
- Labour market conditions tighten further
- Capacity utilisation hits record high
- Indicators suggest heightened investment activity
- Upward pressure grows on our GDP forecasts
Inflationary pressures continue to mount. That’s the main theme in today’s NZIER Quarterly Survey of Business Opinion (QSBO). Pricing intentions remain lofty, labour shortages are becoming more severe and capacity utilisation has hit a record. Some commentators reckon rising CPI inflation is all about oil and fresh fruit and veges. The QSBO would tend to suggest that there’s a little more to it.
Why the Reservation?
- Business optimism keeps abating
- But real-economy expectations stay solid
- And inflation pointers robust-to-rising
- Consistent with our macro views
- But inconsistent with a lagging RBNZ
But the real story from today’s business survey, if you’ll pardon the pun, is about inflation. In particular, its inflation expectations variable continued to float back up, with 1.83%. This compares to 1.73% in February and 1.44% back in October. And this is before we get the Q1 CPI outcome, which we believe will show annual inflation already up to 2.1%, from 1.3%.