EST - Economic Shock Treatment

EST - Economic Shock Treatment

The RBNZ today announced a surprise 25bp tightening (only 3 of the 14 economists surveyed by Bloomberg were forecasting the move), taking the OCR to an unprecedented 8.0%.

The change was stimulated by a much stronger than expected terms of trade tragectory, as dairy prices have surged 60% over the year. Fonterra recently announed an additional NZ$1.18 per kg of milk solids to next years payout (total payout now , NZ$5.53 kg/MS), which represents just under NZ$2 billion in additional rural income (assuming same level of production). The RBNZ dedicated a number of pages in the MPS to explaining the likely impact of the increase in dairy prices - outling the the increased inflationary pressures likely to be bought about over the medium term by the various impacts of higher dairy prices on farm incomes, domestic dairy prices, rural asset prices and despite a higher exchange rate (which will be lifted by todays tightening and outlook for commodity prices).

The RBNZ also increased their inflation track (despite the tightening) and pushed up their growth forecasts substantially. According to RBNZ the NZ economy is likely to post an inflated 3.3% in the year to March 08 (up form 3%). JPMorgan and consensus are closer to 2.7%. The upward revision to growth comes despite a downward revision to export volumes and is all consumption driven.

The RBNZ continues to see , NZD as 'overcooked' and inhibiting export lead growth rotation. Today's hike coupled with surging dairy prices will exacerbate this problem.

The RBNZ explicitly gave no guidance to future policy decisions due to it being so late in the tightening cycle and a need to assess economic developments over the next few months. Data dependant.

One thing remains clear, the RBNZ's frustrations around the housing market (which received further mention with regards to the increasing ownership of NZ property by foreigners - which is further supporting the market), capacity utilisation rates and the inflation tragectory remain. It is fair to say that even after today's shock tightening there is at least a 30% chance of another rate rise in September, as the RBNZ continues down the war path on inflation...

ENDS

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