The market is really struggling with the RBNZ’s threat to cut rates. Following their prior meeting, the RBNZ stated that the next move could be down:
The New Zealand dollar has stayed elevated despite recent falls in commodity prices. Should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings.
Well, for those that do not watch kiwi data, everything has been weaker than the RBNZ expected. What i cannot figure out is why everyone thinks that the RBNZ won’t cut rates at their next meeting…
Growth has been lower than the RBNZ expected (Q3 revised down 10bps to 0.7%q/q, and Q1 @ 0.3%q/q v. RBNZ 0.6%q/q), the unemployment rate has been higher than they expected (Q1 6.7% v. RBNZ 6.3% – no recovery from the GFC at all), trading partner growth has been weaker than expected (they had 2.5% for Aus in Q4 v. actual 2.25%, and 3.3%y/y for Q2 v. RBA 2.75% for the RBA), and due to weak revenue growth, every indication is that the largest fiscal contraction in the advanced nations (the IMF has the swing in the cyclically adjusted primary balance at 3.6ppts of GDP in 2013) is set to get even larger.
Inflation has also been weaker than expected: Q1 inflation was 0.5%q/q (RBNZ 0.7%q/q) taking annual inflation to 1.6%y/y (RBNZ 1.7%y/y). The trajectory of food price inflation (~20% of the basket) suggests that overall inflation will again be lower than the RBNZ expects in Q2 (say 0.5%q/q v. RBNZ 0.8%q/q) – which would likely see YoY inflation fall to 1.0% by Sep’12 (their target it 1% to 3%). The Dec’13 forecast likely falls to 1.6%y/y, and the Dec’14 forecast to 1.8%y/y … basically the entire inflation profile below the 2% mid-point of the RBNZ’s 2% to 3% range.
As i see it, with the output gap widening, and inflation heading to the bottom of their 1% to 3% band, the argument for easier monetary policy is both strong and clear.
Apparently not… at the close Fridayy, the OIS market had priced in 8bps of easing at the RBNZ’s June meeting, and 19bps across the next year.
The re-build argument against easing reminds me of the ‘mining-boom’ story that tripped all of us Aussie folk up in 2011.