FXstreet.com (Barcelona) - Craig Ebert of Bank of New Zealand
believes that Thursday´s Monetary Policy Statement (MPS) is likely
to look and sound dovish but the Bank has a high hurdle for any
further reduction in the Official Cash Rate (
He suspects that the RBNZ is bound to forecast a sifter CPI
inflation path than it previously had. Ebert notes that annual
inflation, on this count, dipped to 0.8& in Q3 compared to the
Bank´s expectation on 1.0%. Its CPI inflation track might well be
slower to get back up to the 2.0% mid-point it now emphasises, let
alone the 3.0% upper edge by the second half of 2014 the way that
he can envisage.
Ebert feels that the recent weak Household Labour Force Survey
statistics need to be treated with caution as it appeared to be at
odds with other information on the jobs market. However, at least
he notes that it has warned of more spare capacity in the economy
than the Bank had previously estimated.
He writes, "Since the September MPS we've also seen the trade
weighted exchange rate trend upwards, to be a bit higher than the
Bank assumed it would be by now. Will the Bank, come Thursday
morning, still be forecasting an imminent decline in the TWI? If
not, it infers more downward pressure on the headline CPI."
While GDP proved stronger that the September MPS thought for Q2, he
notes that clouds have emerged around GDP performance in Q3. He
also notes that despite surprising upside Overseas Trade Index
numbers last night, he doesn't see them translating into chunky GDP
as import volumes looked slow in core terms.
Due to the numerous clouds surrounding Q3 economic indicators, he
suspects that the Reserve bank will have toned down its view on GDP
for the quarter, especially with the material risk that it could
prove flat, or even negative. So with all of these negative issues
at play he feels it is easy to see how the Bank could take a dovish
approach. However, he notes that the RBNZ are known to be fearful
of making cheap money even cheaper.
He is not so sure that the Bank feels comfortable in adding
demand-side fuel to a housing market that is already experiencing a
reheating of inflation especially with mortgage rates already so
low and house prices as high as they are in relation to economic
Also economic confidence has steadily risen with economic expansion
expected to follow over the next 6-12 months so making a knee jerk
reaction may be detrimental in the longer term. New Zealand´s terms
of trade are stabilising at a still solid level in relation to
long-term trends and while about 10% off their highs at mid 2011,
they are still around 17% higher than they were 10 years ago.
He finishes by highlighting, "The other thing that should have the
Reserve Bank thinking twice about cutting the OCR any further, just
because it can, is that the money and credit aggregates continue to
show increasing signs of life. This was evidenced in October's
update from the RBNZ last Friday. Whether one looks upon this as a
positive sign, of economic confidence, or negatively, as another
phase of inopportune re-leveraging, it's no argument for interest
rates to move even lower."