PwC expectations ahead of June Monetary Policy Statement

PwC expectations ahead of the Reserve Bank’s June Monetary Policy Statement

Ahead of the Reserve Bank’s Monetary Policy statement (MPS) being released tomorrow, PwC Director and economics expert Chris Money says, “We expect the RBNZ to hike the OCR by another 25bps (to 3.25%) but revise lower its GDP and inflation forecasts allowing it to also revise lower the pace of future hikes.

“The March MPS was extremely ‘aggressive’ in regards to its projected OCR track. Those forecasts helped to fuel a materially stronger NZD than the RBNZ expected. Independently, dairy prices have dropped without any material adjustment in the currency. The divergence between these two is extremely important due to the impact they can have on rural incomes. Lower rural income/spending and investment suggests lower GDP growth (and related demand-side inflation).

“The higher dollar has also helped suppress inflation and so these forecasts should also be revised a touch lower (see charts below). Taken together, less imminent inflation and inflation pressures (albeit due to a strong NZD) may not require as many OCR hikes as they previously indicated.

“From a market perspective, short-term swap rates have fallen below a level we believe is economically/fundamentally justified when considering the likely path of the OCR in coming years.

“Accordingly, short-term swap rates could actually rise after the meeting; however we expect a reasonably limited reaction in interest rate markets. The more interesting reaction to watch will be the currency given the RBNZ’s discomfort with the NZD’s level now that dairy prices have decreased. The RBNZ want a lower currency and we are looking for them to give this some ‘air time’,” concludes Mr Money.

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