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Business As Usual For RBNZ
At their upcoming September meeting this week, the RBNZ is widely expected to leave policy unchanged. Among the data since the last meeting there have been some positive surprises but most likely not enough to justify a shift in monetary policy as political uncertainty cast a cloud over the outlook.
It will take quite a while for a new government to be formed and for its fiscal policies and effects on the economy to become clear. Given this, the RBNZ is likely to want to remain on the sidelines ahead of its full economic assessment in November.
New Zealand Economy Improving But Inflation Still Lagging
In terms of the economy, there has been some solid momentum with economic growth rising 2.5% year-over-year in June, though still slightly below the RBNZ’s forecast of 2.6%. The outlook for the coming years is also positive given the changing dynamic of growth in New Zealand recently which has seen a shift away from construction-based growth and is now being led by strong export commodity prices, a strengthening tourism industry, and relatively low-interest rates. Furthermore, whoever forms a coalition government in the coming weeks is likely to provide a fiscal boost over the coming years which should keep growth supported.
Despite the better outlook for growth, however, Inflation is lagging, currently running at 1.7%, which is just below the mid-point of the RBNZ’s 1% – 3% range and is forecast by the bank to fall back to 0.9% by March 2018.
The bank has previously warned about excessive strengthening in NZD. However, the increase in hawkish rhetoric by other central banks in the G10 space has helped cap some of this upside pressure. The BOC has now raised rates twice and is on course for further increases while both the RBA and BOE have given clear hawkish signals at recent meetings.
Housing Market in Focus
One area that traders will be particularly keen to receive an update on will be the housing market. At the August MPS, the RBNZ highlighted the high level of uncertainty that remains around house prices and whether appreciation will continue to decline in coming months. House sales are now down 20% year over year but interestingly, are mapping a similar pattern to that seen before the 2014 elections before they picked up again. Indeed, the August REINZ highlighted a potential bottom in the sales decline seen in Auckland over the last twelve months. Considering that Auckland is facing a supply/demand imbalance and that a potential capital gains tax increase has been postponed for three years, there is likely not much further downside momentum to be seen.
