RBNZ Monetary Policy Decision & Monetary Policy Statement Due At 20:00 GMT On Wednesday 7th February 2018, Press Conference Due At 21:00 GMT

All of those surveyed expect the Reserve Bank of New Zealand (RBNZ) to stand pat and leave its Official Cash Rate at 1.75%.

Most believe that interim Governor Grant Spencer will act as a placeholder, before Adrian Orr assumes the role in March. As a result, consensus looks for the Reserve Bank to maintain its balanced assessment and to emphasise that interest rates are likely to remain low for a considerable period of time.

The NZIER Shadow Board has once again recommended that the Reserve Bank should remain on hold with a small tightening bias, although it stressed that there is no urgency to lift the OCR. NZIER’s chief economist stressed that “businesses have become more downbeat about the economy since the new Government took office. Although this pessimism is not reflected in expected demand in their own business, it still suggests the Reserve Bank should allow more time to assess these recent developments before lifting interest rates.”

The recently released Q4 CPI data was perhaps not as weak as the headlines suggested, as the domestic inflationary pressures were more upbeat than the tradeables side of the release which weighed on the headline. Nonetheless, markets reacted to the data pushing out expectations of the first RBNZ rate increase from November 2018 to the first quarter of 2019. At the time of writing OIS are only pricing in 13bps worth of tightening for the reminder of the year (or a little over a 50/50 chance of a hike).

Westpac are more sanguine than the majority, noting that they “have long argued that inflation will prove lower than the RBNZ expects, and continue to forecast OCR hikes only from late-2019.”

The Q4 labour market report proved to be slightly more encouraging than the inflation release at first glance, although it doesn’t seem to have altered the monetary policy outlook for most. Following the release ANZ noted that “the labour market remains strong, but is perhaps showing a few more signs of slowing under its own (capacity-constrained) weight.  But despite this, signs of a sustained lift in wage pressure remain tentative at best. Some wage measures are off their lows, but are hardly lifting in a way that would suggest broader inflation pressures are about to be unleashed. We therefore see little in the figures to alter the RBNZ’s cautious stance towards the monetary policy outlook.”

Westpac struck a similar tone, opining that “However, a broader range of measures suggests that there is still some slack remaining in the labour market. Wage growth remains very subdued, even after accounting for low inflation. There is no urgency for the Reserve Bank to raise interest rates in this environment.”

This decision will be accompanied by the quarterly Monetary Policy Statement (MPS) which will include the latest set of economic forecasts (November’s MPS can be found here).

It is also worth noting that a new Policy Targets Agreement (PTA) is yet to be signed. ASB suggest that “the published forecasts should depict a solid outlook for economic outlook. The low inflation starting point and higher than expected NZD could result in marginal downward tweaks in the published Official Cash Rate profile, but given pending changes in the monetary policy framework, financial markets should tread cautiously on drawing too much into any tweaks.”

What the bank desks are saying: -

ANZ: The RBNZ will again leave the OCR at 1.75%, and retain a cautiously upbeat stance. Developments since the November Statement have been mixed to say the least, but we are not expecting the broad spirit of its assessment to change a great deal. A similar interest rate profile is likely (although at the margin the risks are perhaps that it is a touch lower). The RBNZ is not expecting to have to tighten until the second half of 2019. This is a view we now share.

ASB: On Thursday, the RBNZ delivers its final Monetary Policy Statement, and penultimate Official Cash Rate (OCR) decision under the current Policy Target Agreement. Grant Spencer has been acting Governor since Wheeler’s 5-year term ended in September (just after the General Election). Adrian Orr has subsequently been announced as the new Governor, taking over on March 27th (just days after the March 22nd OCR review). It’s widely expected Adrian Orr will sign a Policy Targets Agreement that incorporates a second target of maximizing employment, alongside price stability. The details of such are yet to be announced. With a change in team, rules and referee taking place at the RBNZ, along with the general consensus that there is no urgency to move rates (see chart of the week), there little need for the RBNZ to offer anything more than an update on where it sees inflationary pressure heading. The published forecasts should depict a solid outlook for economic outlook. A weaker inflation starting point and higher-than-expected NZD could result in marginal downward tweaks in the published OCR profile. However, due to pending changes in the monetary policy framework, financial markets would be best to interpret the rate profile cautiously. One of the key thematics we have been emphasising is interest rate convergence, with rising (but lower) global interest rates converging with upwardly drifting (but higher) NZD rates. While our 1.75% OCR is currently above equivalent policy rates for most OECD comparators, global short-term rates are expected to play catch-up. Current market pricing has close to tspanee Fed hikes fully priced in for 2018, versus our on hold for 2018 OCR view and market pricing of around 15bps of OCR hikes by the end of the year. The removal of policy accommodation is also expected by the ECB and Bank of England, contributing to further compression with NZD rates. Australian short-term rates are also expected to edge up, albeit gradually. To a large extent the expected moves in policy rates have already been “priced in” to the curve, particularly for short-to-medium-term horizons. Viewing wholesale interest rate curves shows that NZD rates are below USD counterparts over the 6-month to the 4-year tenor. This convergence is taking place amid a backdrop of a trend decline in assessments of where policy interest rates will settle in the longer term. Estimates of the neutral NZ policy rate OCR rate at around 3.5% (as compared to 6-7% back in 1999) are only 75 bps above current estimates of where the Fed policy rate will gravitate to in the longer-term. Potential catalysts include the achievement of low inflation and low inflation expectations given disinflation by the RBNZ, weaker productivity growth, a potential “glut” of savings over investment and the likelihood that policy moves have greater traction, due to the climb in indebtedness.

BNZ: At Thursday’s Monetary Policy Statement, we expect the RBNZ will largely stick with the OCR forecasts it had back in November. That is, no full first OCR hike until early 2020. The information flow over the last couple of months might even argue, at the margin, for a softer track. However, this is balanced by 1) the sense there is already a strong precautionary element to the OCR setting, 2) the Bank’s recent emphasis on the flexibility it has in guiding inflation to the mid-point of its target band and 3) the fact there are a number of identifiable inflation impulses on the near horizon. This probably explains why the market is still looking for a first rate hike far earlier than the RBNZ has indicated – albeit that this expectation has drifted out into early 2019, from late 2018. We have also delayed our view on OCR hikes, to a February 2019 start point (while pushing our peak, still 3.00%, out to 2020).

Westpac: We expect the RBNZ to continue with its firmly neutral OCR outlook and repeat its long–held guidance that “Monetary policy will remain accommodative for a considerable period”. Recent developments have been roughly neutral, with low inflation and the high exchange rate counterbalanced by a resurgent housing market and upwardly revised GDP. Foreign exchange markets may react to any comment about the exchange rate being too high, but interest rate markets are unlikely to be perturbed by a steady–as–she–goes MPS.