Subdued data won’t faze the Bank - Capital Economics
Australia & New Zealand Economics

Subdued data won’t faze the Bank

RBNZ Watch
Written by Ben Udy

New Zealand has probably experienced a second technical recession over the past couple of quarters. Even so, the labour market continues to recover and inflation is in good shape. So the Bank shouldn’t feel the need to deliver more stimulus. We expect the RBNZ to keep policy settings unchanged at its meeting on Wednesday 14th April. And given the solid rebound in activity and in the labour market that we think lies ahead, we expect the RBNZ to hike rates next year.

  • RBNZ should shrug off second technical recession and keep policy unchanged
  • The Bank’s new house price focus shouldn’t change the policy outlook
  • We still expect the RBNZ to hike rates in 2022

New Zealand has probably experienced a second technical recession over the past couple of quarters. Even so, the labour market continues to recover and inflation is in good shape. So the Bank shouldn’t feel the need to deliver more stimulus. We expect the RBNZ to keep policy settings unchanged at its meeting on Wednesday 14th April. And given the solid rebound in activity and in the labour market that we think lies ahead, we expect the RBNZ to hike rates next year.

RBNZ to shrug off weaker data

The lockdowns in Auckland during Q1 mean that GDP probably declined last quarter. Recent economic data have been subdued. Electronic card transactions fell for a third consecutive month in February. And given that the longest of the recent lockdowns took place for one week in March, card transactions are bound to have declined again in the final month of the quarter. On that basis, we have pencilled in a 2% q/q decline in consumption in the quarter. (See Chart 1.) In addition, imports of capital goods have remained subdued which points to weak business investment. Overall, we have pencilled in a 0.7% decline in GDP in Q1.

Chart 1: Electronic Card Transactions & Consumption

Sources: Refinitiv, Stats NZ, Capital Economics

And given that GDP declined 1.0% q/q in Q4, a fall in Q1 would mark a second technical recession. Even so, we don’t think the RBNZ will be too concerned. Much of the decline in activity was driven by the brief lockdowns, rather than underlying weakness in the economy. And lockdowns should become less frequent as the country becomes vaccinated. Admittedly, the pace of the vaccination rollout remains slow. At the current rate, it would take more than 15 years to vaccinate the entire population. Still, with all border and quarantine workers now vaccinated the chances of the virus entering the country has meaningfully declined.

And even while activity data have been mixed, the labour market is in good shape. The drop in the unemployment rate to just 4.9% in Q4 means that around a third of the deterioration in the labour market has been unwound. That was particularly surprising given that the government’s generous wage subsidy ended at the start of October. Of course, the RBNZ is interested in many indicators other than the unemployment rate. But our labour market suite which incorporates a range of the RBNZ’s favoured labour market indicators shows an even sharper improvement in the labour market.

Housing mandate

In response to surging house prices, the government has now added a requirement that the RBNZ consider the impact of its monetary policy decisions on house prices. While we don’t think this drastically alters the outlook for monetary policy, at the margin it will make the Bank more inclined to tighten policy during housing booms.

Admittedly, the government itself implemented a range of tax policies this month aimed at making housing a less appealing investment vehicle. Along with the RBNZ’s macroprudential policies which were reintroduced in March and are set to be tightened in May, that should result in a cooling in the housing market in the months ahead. Even so, with house prices up 21% y/y in February, we think the Bank would be reluctant to exacerbate the situation by easing policy any further unless necessary.

We think the strength in the housing market and the solid labour market are enough for the RBNZ to shrug off the weaker activity data We therefore expect no change in policy at next week’s meeting on Wednesday 14th April.

Asset purchases to end this year

Indeed, we still think that the Bank’s next move will be to tighten. After all, most measures of underlying inflation are already around or above the mid-point of the RBNZ’s 1-3% target. And near term indicators point to a surge in inflation in the months ahead. (See Chart 2.) While they almost certainly overstate how far inflation will rise, we do expect inflation to remain above the Bank’s target mid-point from the middle of this year. As the labour market recovers further toward pre-virus levels we think the Bank will begin to assess its options for monetary tightening. The first step will probably be winding down the Bank’s asset purchase programme.

Chart 2: Pricing Expectations & Inflation

Sources: Refinitiv, Capital Economics

At the Bank’s last meeting in February, the Governor stressed that changes in the Bank’s weekly asset purchases reflected weekly variation based on market functioning, rather than a change in monetary policy. But weekly purchases have continued to decline, and the Bank appears to have stopped buying local government bonds. (See Chart 3.)

If the Bank still intends to reach its current cap of $100bn by June 2022 then it will need to step up its purchases considerably at some point. But given our bullish view on the outlook we think that it’s more likely that the Bank continues to undershoot the required rate and winds down its asset purchase programme around the end of the year.

Chart 3: Weekly Bond Purchases by the RBNZ ($bn)

Sources: RBNZ, Capital Economics

Rate hikes in 2022

The bar to rate hikes is higher. In particular, we think that Bank will wait until inflation is persistently above the mid-point of its target and employment is above the maximum sustainable level. We expect those conditions to be met in the second half of 2022. So we’ve pencilled in the Bank’s first hike in November next year. We’re also expecting a further two hikes by the middle of 2023. That’s much more hawkish than the analyst consensus which currently has no rate hikes in the foreseeable future. By contrast, our view is broadly consistent with market pricing. (See Chart 4.)

Chart 4: Interest Rates (%)

Sources: Refinitiv, Bloomberg, Capital Economics

We expect policy tightening in the coming years to push the New Zealand dollar a touch higher from US$0.71 now to US$0.75 by the end of 2022. If we’re right, that would put it at parity with the Australian dollar for the first time since the 1970s.

Table 1: RBNZ Monetary Policy Background Information

Monetary Policy Meetings

There are seven Monetary Policy Reviews each year, with the policy decision announced at 2.00 pm on the scheduled day. The Monetary Policy Committee includes the Governor, the Deputy Governor, two other internal appointees, three external appointees and a non-voting Treasury observer.

Release of Minutes

A non-attributed record of the meeting is published alongside the decision and an overview of the economic outlook, the risks and policy options discussed, any material differences of view or judgement, and an unattributed record of any vote taken.

Other Publications

The Bank publishes its Monetary Policy Statement four times a year. Its release coincides with the policy announcements in February, May, August and November.

The Monetary Policy Statement sets out how the Bank proposes to achieve its targets, how it proposes to formulate and implement monetary policy during the next five years and how policy has been implemented since the last Monetary Policy Statement. It is accompanied by a press conference.

Disclosure of Voting

Non-attributed votes will be published when there is not a consensus.

Policy Framework

The current remit for the Monetary Policy Committee instructs the Bank to meet two objectives. First, to “keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent mid-point.” Second, to “support maximum sustainable employment”. In doing this, it must seek “to avoid unnecessary instability in output, interest rates and the exchange rate“.

Governor

Adrian Orr

Deputy Governor

Geoff Bascand

Other Members of the Monetary Policy Committee

Internal

Christian Hawkesby

Yuong Ha

External

Professor Caroline Saunders

Professor Bob Buckle

Peter Harris

Announcements

Date

Outcome/Forecast

Date

Outcome/Forecast

*Denotes announcements accompanied by the Monetary Policy Statement and press conference

12th February 2020*

No major policy change

24th February 2021*

No major policy change

16th March 2020

OCR cut to 0.25%

14th April 2021

No major policy change

23rd March 2020

Launched $30bn bond purchases

26th May 2021*

No major policy change

13th May 2020*

Increased cap on bond purchases to $60bn

14th July 2021

End of Asset Purchase Programme

24th June 2020

No major policy change

18th August 2021*

No major policy change

12th August 2020*

Increased cap on bond purchases to $100bn

6th October 2021

No major policy change

23rd September 2020

No major policy change

24th November 2021*

No major policy change

11th November 2020*

Launch of funding for lending programme


Ben Udy, Australia & New Zealand Economist, ben.udy@capitaleconomics.com