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RBNZ Gov. Wheeler Reiterates No Changes To OCR In The Near Term

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The RBNZ Governor Wheeler gave a speech last week in Auckland where he defended the RBNZ’s policy decision to keep interest rates steady.

He said that there were significant downside risks to the outlook for the global economy, especially the protectionist policies from the new U.S. administration. On the domestic front, the RBNZ Governor highlighted the imbalances in the housing markets as the main risk.

Markets have been speculating on when the RBNZ will be hiking interest rates next. It is almost a certainty that the next policy change from the RBNZ will be a hike in interest rates, but it is now a question of when. The OCR is expected remain unchanged at 1.75%, when the RBNZ meets later this month.

Governor Wheeler reiterated the RBNZ’s policy statement from February noting that the central bank remained comfortable with its economic projections. The central bank forecast that the OCR will remain unchanged until 2019 but that the risks were equally balanced.

The RBNZ governor’s speech did not add anything new for the markets, which as a result saw a rather muted response. However, the fact remains that despite the recent uptick in inflation which has been encouraging, the RBNZ is unlikely to change its monetary policy.

On the domestic front, the central bank said that it was concerned with the imbalances surrounding the housing markets as house prices continued to rise steadily around Auckland which has been putting a squeeze on household incomes. The governor also warned on rising household debt which remains at historically high levels and noted the downside risks of the leverage against the housing assets.

Wheeler said that the housing market was at risk of a correction which could be triggered by a change in global conditions. The central bank is already looking at the increase in mortgage lending at the high debt-income areas which it expects to reign in with macro-prudential lending restrictions, which it expects will lessen the burden in the housing markets.

New Zealand terms of trade rises 5.7% in Q4, 2016

  • Q4 terms of trade: 5.7% vs. 4.0%
  • Export price index: 4.8% vs. -2.7% previously
  • Import price index: -0.8% vs. -1.1% previously

Earlier last week, the terms of trade, which is the ratio of export to import prices and a measure of New Zealand’s purchasing power abroad increased. Data showed that terms of trade increased 5.7% in the quarter ending December 2016 and was the highest reading since June 2014.

The increase in the terms of trade came on the back of a 4.8% increase in export prices driven by a recovery seen in the dairy prices. Import prices fell 0.8% which helped to boost the overall terms of the trade data.

New Zealand terms of trade, quarter ending December 2016
New Zealand terms of trade, quarter ending December 2016

A higher terms of trade is expected to have a positive influence on the domestic demand and could also see influencing consumer prices. But the continued decline in the import prices (down 0.8% in Q4 2016) highlighted the challenges facing the RBNZ in its efforts to push inflation towards its 2% target.

The weak pace of imports is likely to keep a lid on imported inflation which could mean that the RBNZ will remain on the sidelines until there is strong evidence of a pick-up in domestic inflation.

On the export side, dairy prices expanded 14% which was also reinforced by increase in prices of lamb, forestry and manufactured goods. The rising cost of dairy prices is expected to see the NZ dollar export price also increase with the potential that the terms of trade could further strengthen in first quarter of 2017. For the year, export prices turned flat.

While import prices were lower 6.6% on the year. There was a weakness across the different categories but demand for machinery and electrical goods fell. This was despite, the appreciation of the New Zealand dollar which rose 7.6% over the year. Imported inflation is expected to remain subdued for the most part of this year.

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