RBNZ expected to stand pat and issue cautious statement in first review under new govt

Reserve Bank acting governor Grant Spencer is expected to keep rates on hold next Thursday in his first full monetary policy statement, and while the forecasts might be rejigged to note rising inflationary pressure and a weaker currency, economists expect an extremely cautious tone.

All 16 economists polled by Bloomberg expect the central bank to keep the official cash rate at 1.75 percent. Beyond that, only one of 12 expects a 25 basis point lift in February versus the median that sees rates on hold until the fourth quarter of 2018. The OCR has been on hold since November 2016 when it was cut by 25 basis points.

In its August monetary policy statement, the last under former governor Graeme Wheeler, the central bank's forecasts indicated rates would stay on hold until at least September 2019, largely due to a lack of inflationary pressure. However, the New Zealand dollar is 7 percent lower than the central bank projected on a trade-weighted index basis and annual inflation was 1.9 percent in the third quarter versus the RBNZ's forecast 1.6 percent.

On top of that, the new government's policies, including increasing the minimum wage, a regional petrol tax for Auckland, easier fiscal policy and generally a higher cost of doing business are expected to push inflation higher. Against that backdrop, some economists said the central bank could tweak its cash rate forecasts.

"The coalition government's broad policy suite is inflationary and the NZD has fallen sharply. The RBNZ will likely have to deal with this aspect in their forecasts. It may be too soon to see major changes to the OCR track at next week's MPS. But along with other data such as the latest jobs report, the balance of risks is pointing to a tighter labour market and upside risks to the inflation outlook," said Alex Stanley, senior interest rate strategist at National Australia Bank. Local subsidiary Bank of New Zealand expects the first rate hike in August 2018, ahead of the median.

Annette Beacher, head of economic analysis in Asia for TD Securities, expects more action and anticipates the first rate hike in February next year

"As there is going to be a material jump in government spending, eating into hard-earned fiscal surpluses and lifting debt outstanding over the forward estimates, this supports our out-of-consensus call for the RBNZ to turn hawkish soon, potentially as soon as next week," she said. "We think the market is asleep at the wheel, and not prepared for the bank under governor Spencer to confirm that the next move remains up for the cash rate."

Westpac Banking Corp chief economist Dominick Stephens, however, expects the central bank to "give the same neutral policy guidance that it has given all year." He also does not expect the central bank to change its cash rate forecasts.

"We now expect that the RBNZ will repeat the same guidance paragraph and issue the same flat OCR forecast as in recent Monetary Policy Statements," he said. The uncertainty is too great and "the Reserve Bank is better off waiting and seeing what happens with government policy, rather than reacting prematurely to policy changes that may or may not eventuate."

Stephens also expects the central bank to lower its near-term gross domestic product and house price forecasts, adding to his view and rates won't be budging anytime soon.

Money markets concur as the overnight index swap market now predicts the first rate hike in February 2019 versus a prior view of November 2018.

(BusinessDesk)