If you missed’em, the Bank of Canada (BOC) released its monetary policy statements yesterday while Reserve Bank of New Zealand (RBNZ) Governor Wheeler had a speech on monetary policy. So, what did the BOC and RBNZ’s Wheeler have to say? Well, time to find out!
The BOC released one of its shortest monetary policy press statements ever, and there was no presser to boot. However, there were enough clues for forex traders to chew on.
Monetary Policy Maintained
The BOC decided to keep rates on hold, with the benchmark overnight rate at 0.50%, the bank rate at 0.75%, and the deposit rate at 0.25%.
There was no explicit forward guidance, but the BOC likely maintained its easing bias. Remember, BOC Governor Stephen Poloz said during the presser for the January BOC statement that (emphasis mine):
“Should any of those downside risks materialise and put our inflation target at risk then we would have the room to maneuver. So, in that context, especially with inflation having been below target for a prolonged period, yes, a rate cut remains on the table and it would remain on the table for as long as downside risks are still present.”
And as a refresher, these downside risks are mainly the following:
- A “protectionist” U.S. trade policy
- Sluggish business investment in Canada persists, hurting growth and inflation
- Potentially weaker household spending due to high levels of household indebtedness
- Investment outflows from EMEs that may result in slower global and Canadian growth
Positive economic developments downplayed
As I noted in my latest Economic Snapshot for Canada, the month-on-month reading for headline CPI in January was at a 23-month high while the year-on-year reading was at a 15-month high. Moreover, the headline reading came in at 2.1%, which is already above the BOC’s 2.0% inflation target. And as I noted back then, the main driver for the higher CPI readings was the higher cost of energy. Although I also noted that other CPI components printed increases as well.
Well, the BOC also noted that inflation was indeed higher, but instead of being happy about it, the BOC took a rather pessimistic stance by saying that the effects of higher energy prices on inflation “will be temporary.” And as revealed in the January Monetary Policy Report (MPR), the BOC also forecasts that CPI would be pulled down by the “disinflationary effect of food prices and excess capacity through most of the year.” The BOC also added that the “three measures of core inflation, taken together, continue to point to material excess capacity in the economy.”
With regard to trade, I also noted in my Economic Snapshot that Canada printed back-to-back trade surpluses in November and December. However, the BOC just shrugged that off and said that “exports continue to face the ongoing competitiveness challenges described in the January MPR.” And these competitiveness challenges, according to the January MPR, include the following:
- “The recent appreciation of the Canadian dollar against the currencies of some key competitors,” which make Canadian exports less competitive.
- Trump’s corporate tax cut plans, which will likely siphon investments away from Canada in favor of the U.S., thereby restraining Canada’s production and exports.
- Trump’s “protectionist” policies, which may limit investment flows from the U.S. to Canada, as well as possibly imposing a trade barrier on Canadian exports.
- Past decline in energy sector investment that will limit the growth of Canadian energy exports, namely oil.
I guess Poloz and company got rattled when Trump emphasized his “America First” policy, as well as his tax plans, during Trump’s speech before Congress.
As for the labor market, Canada has been seeing jobs growth lately. Even better, full-time employment printed consecutive increases in December and January. However, the BOC downplayed that and focused on the negative aspects instead, saying that “subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States.”
Bottom line? Things may look good now, but they likely won’t look too good in the future, especially if Trump’s planned fiscal policies finally kick in. As such, no rate hike anytime soon. Also, further cuts may even be needed.
The RBNZ ain’t gonna be having another monetary policy statement until March 22. However, RBNZ Governor Graeme Wheeler gave a speech yesterday, which shed some light on whether or not the RBNZ’s monetary policy stance has changed. Recall, the RBNZ switched to a neutral bias during the February RBNZ statement when Wheeler said during the presser that (emphasis mine):
“What we’ve adopted is pretty much a neutral bias, if you talk about bias and stance of monetary policy. If you go back to November, we had an easing bias, a slight easing bias built into the forecast because we had a 20% probability of a further OCR cut built in. Now, we’ve removed that. And we’re, in essence, saying that if you look at the risks around an OCR increasing or decreasing, we think that they’re evenly balanced.”
Monetary policy bias still neutral
Wheeler put that issue out of the way early on when he said that (emphasis mine):
“The risks around future OCR movements are considered to be equally weighted. In effect, there is an equal probability that the next OCR adjustment could be up or down.”
Risks to global outlook
Wheeler noted that “the outlook for global growth has improved over the past 6 months due to rising commodity prices and stronger business and consumer sentiment.” However, “Europe, China and the United States” were “major sources of uncertainty.” As such, global outlook is tilted to the downside.
With regard to Europe, Wheeler named the Brexit Saga as the #1 source of uncertainty because the “combined EU and UK economies absorb around 14 percent of [New Zealand’s] goods exports and 23 percent of [New Zealand’s] service exports.” So if political considerations trump trade and growth consideration, thereby hurting the two economies, then that would also be bad for New Zealand.
Moving on to China, Wheeler said that a “significant slowdown” in China is a major risk because China is New Zealand’s main export destination. Moreover, some of New Zealand’s other export markets, such as Australia, have China as their main export market as well, so a “significant slowdown” in China would also indirectly hurt New Zealand as well. Thankfully, “the consensus international forecasts are that the Chinese economy will avoid any material slowdown.” In addition, “New Zealand would be partly protected from any mild slowdown in China as some of [New Zealand’s] main exports (e.g. dairy products, meat, and tourism) are supported by China’s move towards more consumption-led growth.”
As for risks associated with the U.S., it was all about Trump’s “protectionist” trade policies. Even if New Zealand’s exports to the U.S. (over $8 billion) were not subjected to tariffs, New Zealand would still suffer indirectly because Trump’s “protectionist” policies would likely result in “lower global demand and weaker commodity prices.”
But on a more upbeat note, Trump’s fiscal stimulus plans “represents an upside risk for New Zealand,” since “New Zealand would benefit through higher commodity prices and increased exports to the US and to our other trading partners experiencing higher growth as a result of the US stimulus.” Moreover, Trump’s stimulus plans would likely result in faster U.S. growth, which may prompt the Fed to “tighten monetary policy more quickly than currently expected,” thereby pushing the Greenback higher and weakening the Kiwi dollar, which would obviously be good for New Zealand’s exports.
Domestic assessment and outlook
Wheeler didn’t show it, but he was probably smiling in his mind when he said the following (emphasis mine):
“New Zealand’s current economic expansion is entering its eighth year of what the OECD describe as a strong broad-based expansion. In the absence of major shocks, prospects look reasonable for continued strong growth over the next two years driven by accommodative monetary policy, construction spending, and net inward migration. If these prospects are realised, the current expansion would be New Zealand’s longest in over 50 years.”
Regarding New Zealand’s domestic outlook, “there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced.”
And Wheeler noted that “The greatest source of [domestic] uncertainty currently lies around the housing market.” However, “house price inflation has moderated substantially in recent months,” so lower chance for a housing bubble.
Wheeler also pointed out that another major risk factor “is that the exchange rate remains higher than projected in the MPS, suppressing tradables inflation and net exports.”
Other sources of uncertainty that were mentioned were the future path for commodity prices, migration, and household savings.
Bottom line? New Zealand’s economy is looking good. Neutral monetary policy bias still pretty clear, though, because lots of uncertainty, yo! Also, strong Kiwi dollar is bad!