No change in rate on horizon
Economists note dovish tone in Spencer’s growth forecasts
Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 per cent as widely expected and signalled no change on the immediate horizon but may have dropped a hint that the bank has lowered its growth forecasts as he begins his six-month stint at the helm.
“Monetary policy will remain accommodative for a considerable period,” Spencer said. “Numerous uncertainties remain and policy may need to adjust accordingly.”
Rates have been on hold since November last year and the central bank’s forecasts show it does not expect to begin lifting rates until September 2019 at the earliest. All 13 economists polled by Bloomberg predicted rates would remain unchanged.
On economic growth, Spencer said the economy grew in line with expectations in the second quarter, following relative weakness in previous quarters. He noted that while exports recovered, construction was weaker than expected.
However, while he said growth is projected to “maintain its current pace going forward”, in August the bank said growth was expected to improve. Gross domestic product grew 0.8 per cent in the three months to June 30, from a revised 0.6 per cent expansion in the March quarter and was 2.5 per cent higher on the year.
Yesterday’s reference to growth was “clearly weaker than the RBNZ’s previous statement”, said Westpac chief economist Dominick Stephens.
He noted that if the most recent GDP outturn was repeated, the annual percentage change would reach 3.2 per cent by June 2018 versus the RBNZ’s forecast of 3.8 per cent in the August monetary policy statement.
The “acknowledgement of a lower growth outlook was an important development that could hint in the direction of a more dovish November monetary policy statement”.
Kiwibank chief economist Zoe Wallis also said the tweak to the language “suggests the Bank’s growth forecasts may be pointing toward a slightly lower growth profile in coming years. This isn’t a surprise given the constraints we are currently seeing, particularly in the construction sector.”
ASB chief economist Nick Tuffley also said the RBNZ may “have shaved its growth outlook slightly” but underscored “the key message is the RBNZ has maintained its neutral stance”. ASB does not expect any rate increases until February 2019.
Cameron Bagrie, chief economist for ANZ Bank in New Zealand, also pointed to the “clear neutral tone”, and said it was hardly surprising given election proximity, key RBNZ leadership changes, and somewhat mixed economic developments.
While he said the comments around growth seem “a little dovish”, he noted “if you put it in the context of sequential growth lifting in Q2 from 0.5 per cent to 0.8 per cent quarter-onquarter then there is probably nothing in it”.
Spencer noted that the New Zealand dollar has eased slightly on a trade-weighted index basis since the bank’s most recent statement in August and “a lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth”.
Spencer said house price inflation continued to moderate due to loan-tovalue ratio restrictions, affordability constraints and a tightening in credit conditions. While the moderation was expected to persist he said there was still a risk of a resurgence in prices given population growth and resource constraints in the construction sector.
Regarding annual inflation, he noted it eased in the June quarter but remained “within the target range”.
Annual inflation was running at 1.7 per cent in the June quarter and the central bank is mandated with keeping it between 1-and-3 per cent, with a focus on the midpoint. He reiterated it may continue to decline in coming quarters reflecting volatility in tradables inflation.
Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term, Spencer said.
Spencer took over from Graeme Wheeler, whose five-year term ended this week. He will remain in the position until the new government appoints a permanent governor.
Numerous uncertainties remain and policy may need to adjust accordingly. Grant Spencer, Acting Reserve Bank governor