RBNZ: Backward Kiwis more touchy on their currency - AmpGFX

It was another confusing RBNZ policy statement where they managed to upgrade their growth outlook, despite recent weaker activity indicators, and yet downgrade their inflation forecasts, and end up with no change in their rates outlook, according to Greg Gibbs,
Analyst at Amplifying Global FX Capital.

Key Quotes

“They see the higher exchange rate since May has dampening their inflation outlook.  And have come to see their fellow Kiwis as more backward-looking in their price setting behavior, further dampening the inflation outlook.  The RBNZ tried to emulate the RBA by sounding tougher on their exchange rate views, but it all gets a bit muddled, and Wheeler and gang don’t quite have the cache and charisma of RBA’s Governor Lowe and team, so it doesn’t come off.”

“Rates outlook unchanged

The NZD has firmed since the RBNZ statement.  It is not exactly clear why; perhaps the market was looking for some downward revision to its rates forecasts?

Some media commentators had said that the NZD fell recently on speculation of lower rate forecasts. However, the RBNZ has and still has rates forecast to remain on hold for the next two years before a very gradual rise towards the end of their three-year forecast horizon.

These rate projections are low considering that rates at 1.75% are well below the RBNZ estimate of neutral of 3.5%, and the economy is expected to grow above potential from a zero output gap starting point.

There is not a case for them to project rate cuts, and little reason for the market to have thought this to be the case.

The main take away for the market is that the rates outlook is unchanged since the May policy statement.”

“Backward looking Kiwi’s

The RBNZ said their recent research suggests that price setting behavior in the economy is more backward looking than they had previously thought.  As such low inflation in recent years will tend to be more persistent. And the economy has to grow more significantly above trend to generate the desired higher inflation outcomes in the RBNZ’s three-year horizon.

The RBNZ said, “Low past inflation appears to be contributing to weak price-setting behaviour by businesses. This is creating a drag on current and future inflation. These weaker price-setting dynamics suggest a need for stronger capacity pressure than might otherwise be necessary to generate a given level of inflation.”

“The implication is that recent weak pricing dynamics are likely to act as a headwind to inflation over the forecast horizon, suggesting that the stance of monetary policy needs to be more accommodative than otherwise.”

“Higher GDP forecasts

The RBNZ have actually boosted their GDP forecasts since May.  This is kind of surprising considering some weaker than expected activity data since the beginning of the year.  However, the key underlying forces supporting growth remain intact, or have improved. (immigration, terms of trade, fiscal expansion, low interest rates). 

As such, the RBNZ remains quite upbeat on growth despite recent weakness in GDP.  In fact, they argue that the recent weakness in growth will result in a bounce back in coming quarters.

However, due to the higher exchange rate and backward looking Kiwis, the higher growth outlook is not enough to lift the inflation outlook that in fact has been revised lower.”

“No need to follow policy moves abroad

The RBNZ have kind of tried to emulate the RBA on their exchange rate and rates rhetoric.  In a similar vein to the RBA, the RBNZ said that less policy accommodation abroad will not be followed by the RBNZ.

They said, “Although central banks in some major advanced economies are starting to raise interest rates, or beginning to consider a gradual lessening of monetary stimulus, it remains appropriate for monetary policy in New Zealand to remain accommodative. With domestic inflationary pressure remaining subdued, the Official Cash Rate (OCR) is projected to remain low for a prolonged period.”