A Review of the RBNZ’s Economic Update

The RBNZ released its much-awaited economic update earlier today. And if y’all can still recall, the surprise announcement that the RBNZ will release this unscheduled economic update sent the Kiwi tumbling against its peers last week, and the Kiwi took another hit across the board yet again when the update was released today, so what did it have to say?

NZD/USD: 15-Minute Forex Chart

NZD/USD: 15-Minute Forex Chart

RBNZ not too worried about growth

The RBNZ thinks that growth prospects in the global economy “have diminished” and that “Significant downside risks remain.” But with regard to the domestic economy, the RBNZ is not too worried since it “is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.”

The RBNZ noted that low dairy prices are a problem, though. And if you’re wondering why that’s a big deal, just know that New Zealand’s economy is literally powered by dairy exports. Concentrated milk alone, for instance, accounts for about 18% of New Zealand’s total exports, which is a pretty large chunk.

Also, as I highlighted in my Review of the RBNZ’s Annual Statement of Intent, the RBNZ is worried that there will be a rise in non-performing loans, since persistently low dairy price would lead to “significant financial pressures for dairy farms, with a significant proportion of the sector facing a third consecutive season of operating losses.” In short, low global dairy prices would hit both the dairy and banking industries.

RBNZ is worried about inflation

The RBNZ listed inflation as one of the domestic uncertainties that it has to face, and the RBNZ also bluntly said that the strong Kiwi, “together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective.”

The RBNZ also said that the annual reading for Q2 CPI came in at 0.4%, but the RBNZ didn’t mention that the actual reading missed both its quarter-on-quarter and year-on-year forecasts, although the RBNZ did admit that “short-term inflation expectations remain low.”

And for reference, highlighted below are the RBNZ’s forecasts, as presented in the June Monetary Policy Statement. And as noted by the RBNZ and as revealed by the CPI report from Statistics New Zealand, Q2 CPI increased by 0.4% on both a quarterly and annual basis, so a swing and miss on both instances.

RBNZ: CPI Forecasts

The RBNZ tried to put on a happy face, though, saying that “Long-term inflation expectations are well-anchored at 2 percent.”

RBNZ is annoyed with the Kiwi

As I noted earlier, the RBNZ was blaming its inflation woes partially on the Kiwi’s recent strength, and rightly so, because the Kiwi’s trade-weighted index (TWI) has been appreciating contrary to the RBNZ’s projected scenarios.

Oh, if you have no idea what the TWI is, it’s basically what it says on the tin – an index of the Kiwi’s performance against a basket of 17 currencies that are weighted based on their level of trade with New Zealand.

Getting back on topic, the RBNZ presented two scenarios in the June Monetary Policy Statement. The first and ideal scenario is that the Kiwi will steadily slide lower until it reaches a TWI of 70 by 2017 and then mill about in that level until about 2019 or so. The other scenario assumes that demand for the higher-yielding Kiwi will persist, so the TWI is projected to remain steady at around 72.6.

RBNZ: TWI Scenarios

The problem now is that the TWI was at 75.68 as of yesterday, which is way higher than anticipated and very likely why the RBNZ said in today’s economic update that “A decline in the exchange rate is needed.”

RBNZ more likely to cut?

RBNZ Chieftain Wheeler said in the June RBNZ statement that (emphasis mine):

Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”

But in today’s economic update, the RBNZ said that (emphasis mine):

“At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.”

The more determined tone is noteworthy, but the RBNZ still has to contend with the threat of worsening the potential housing bubble, which is what I’ll be discussing next.

RBNZ is concerned with the housing market

The RBNZ (as represented by RBNZ Chieftain Wheeler) already sounded rather skittish during the June RBNZ statement, saying that:

“House price inflation in Auckland and other regions is adding to financial stability concerns. Auckland house prices in particular are at very high levels, and additional housing supply is needed.”

In today’s economic update, however, the RBNZ sounded even more concerned, saying that:

“House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability. The Bank is currently consulting on stronger macro-prudential measures aimed at mitigating risks to financial stability from the current boom in house prices.”

What this means is that the threat of a housing bubble is getting worse, but a rate cut would only make it even worse, so the RBNZ is finding other means to address this housing bubble first, which would then give the RBNZ enough room for a rate cut.

You can read about these macro-prudential measures here, if you really want to. The one thing worth noting here is that consultations are expected to finish by August 10, which is also when the next RBNZ monetary policy decision would be. This means that if these proposed measures push through by then (or before), the RBNZ may have enough room for the rate cut that it wants.

Given the RBNZ’s worries and rhetoric, as well as its attempt to contain the housing bubble through alternative means, which may then give the RBNZ some leeway to cut rates, do you think the RBNZ will be cutting rates in August? Share your thoughts by answering the poll below!


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