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The Reserve Bank of New Zealand (RBNZ) is expected to adopt a 'wait-and-watch' stance at the upcoming monetary policy meeting next week, while deciding to leave the benchmark interest rates on hold at 1.75 percent, according to the latest report from ANZ Research.
The central bank’s dovish tone will be guided by change in the balance of risks and endorsing current market pricing, which favours cuts. Domestic data since the November MPS has been mixed but the economy is clearly coming off the boil. Trading partner growth is slowing markedly.
Since the November MPS, Q3 GDP surprised on the downside at just 0.3 percent q/q and a weaker HLFS unwound much of the Q3 upward labour market surprise that inconveniently landed a day before the November MPS.
Meanwhile global data has weakened markedly, particularly in China, Europe and Australia, though this is yet to have any evident impact on demand for New Zealand’s commodities.
The potential growth impacts of a more marked global slowdown are now a more pertinent risk than any delayed impact from last year’s slump in business confidence; this is likely to comprise the downside scenario.
A broadening of inflation pressure remains the most relevant upside risk: firms are reporting sharply higher costs, yet very modest pricing intentions. A key uncertainty is the likely revisions to the estimated output gap (current spare capacity in the economy) and equivalently, potential output (the speed limit of the economy).
These ruminations will determine whether the RBNZ will still conclude that a marked acceleration in GDP growth is required to ensure medium-term inflation heads sustainably back to target, as they have in recent forecasts.
"We are forecasting an OCR cut by year-end, whether the RBNZ changes their growth and OCR forecasts meaningfully next week or not. We expect the economy to continue to fail to accelerate as the year progresses, making the case for easier policy clear in time," the report added.
