RBNZ Observer Update: Rates to be steady for 'sometime'

RBNZ Observer Update
Rates to be steady for 'sometime'

The RBNZ left the OCR unchanged at 2.50%, as expected, with the Governor indicating that he expected to hold steady for 'sometime'. He noted some signs of recovery, particularly in farm investment and the housing market, and that recent weakness has been largely contained to quake-affected Christchurch. The RBNZ seems unconcerned about the inflation outlook but expressed some concern about high oil prices and the high NZD. We still expect economic conditions to warrant a rate rise before year-end.

Facts

- The Governor said, 'confidence and consumer spending have shown signs of recovery, but many firms and households remain adversely affected in Christchurch. To date, activity in the rest of the country appears relatively unaffected, with housing market turnover and business investment beginning to increase.'
- He also said that 'along with relatively favourable climatic conditions, the improved [commodity] price outlook is supporting a pickup in on-farm investment.'
- He noted that 'higher oil prices and the elevated level of the New Zealand dollar are both unwelcome,' and that 'they will have some dampening effect on economic activity'.
- Finally, 'given the outlook for core inflation, [to return comfortably within the target band], and continued economic disruption stemming from the earthquakes, the current level of the OCR is likely to remain appropriate for some time.'

Implications

As always, the post-decision statement was short, so there is little gristle to chew on. The main gist of the statement was largely as expected and does not change our view that the next rate rise is likely to be in Q4. From the RBNZ's perspective there is no need to hint at the timing of the next rate rise, as it is widely understood to be some time away.
One area that differed from our expectation was just how sanguine the RBNZ seems about the outlook for inflation. The Governor did mention some concerns about oil prices, but also pointed out that the OCR level was appropriate because the outlook for 'core' inflation was for a return to target. They seem content to attribute the current high level of CPI inflation (0.8% q-o-q and 4.5% y-o-y) entirely to the effect of last year's tax changes.

Another area of interest was the Governor's concern about the high level of the NZD. The exchange rate is currently at a high level against the USD, trading around 81 cents, though on a trade-weighted basis it is still below its highs of 2010, which is an indication of the extent to which it reflects USD weakness rather than NZD strength. Nonetheless, the Governor's comments are likely to fuel further debate about the level at which the RBNZ might become uncomfortable with the exchange rate, and their appetite to intervene.

Bottom Line

The OCR was left unchanged at 2.50%. The post-decision statement had few surprises and suggested little about the timing of a return of rates towards normal. We still expect economic conditions to warrant a rate rise in Q4.

Paul Bloxham, Chief Economist (Australia and New Zealand)
HSBC Global Research
Economics - Data Reactions
28 April 2011

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