RBNZ: Sitting still amidst policy uncertainty - HSBC

New Zealand economy’s underlying inflation is below target and growth is around trend, not above it, so the RBNZ is expected to be on hold, according to the analysts at HSBC.

Key Quotes

“With a general election scheduled for 23 September, monetary policy has taken a back seat as local attention has turned to politics (as well as the Lions rugby tour and the America’s Cup sailing!). As the various political parties’ policy announcements have started to roll out, it has become clear that the election could be the catalyst for some policy shifts in areas such as housing and migration. These could be important for the outlook for growth, inflation and, ultimately, monetary policy.”

“Migration-driven population growth, in particular, has been a key driver of growth in the New Zealand economy in recent years, on both the demand and the supply side, so any policy changes could have far-reaching consequences. Tighter restrictions aimed at slowing migration would likely result in slower economic growth – but could also be inflationary, if wage pressures were to increase as a result of reduced availability of workers. In addition to policy uncertainty, there is also considerable uncertainty about the impact that policy changes could have on the economy.”

“Fortunately, the RBNZ is in a relatively comfortable position and can afford to wait and see how this all plays out. CPI inflation is sitting near target after several years of undershooting and the underlying measures of inflation are gradually climbing, but are still below the ‘near 2%’ target. The housing market has also cooled markedly since late 2016, especially in Auckland. How long the cooled housing market persists is another uncertainty, but for now, at least, it means that the RBNZ does not need to take further immediate action.”

“Our central outlook for growth and inflation remains unchanged, with a continued absorption of spare capacity expected to gradually lift underlying inflation. In particular, the investment pipeline remains strong, suggesting that cost pressures in the construction sector should continue to lift and, at some point, wage pressures should build. We expect underlying inflation to rise to around 2% by the end of 2017 and the RBNZ to lift its cash rate in early 2018.”