Reserve Bank’s forecasts overtaken

A fresh set of Reserve Bank forecasts will give the first new look at the spending landscape facing the new Government – a landscape which may well be softening.

On Thursday the central bank will release its quarterly monetary policy statement, a lengthy take on the state of the New Zealand and global financial systems, as it reviews the official cash rate.

Even before the new Government announcement observers were practically certain the Reserve Bank would leave the cash rate at 1.75 per cent, and the odds have not changed since Jacinda Ardern became prime minister.

Instead, the focus is likely to fall on the Reserve Bank’s forecasts for economic growth and inflation, which will influence how much room Finance Minister Grant Robertson has to play with before risking posting a deficit in his first Budget in 2018.

Thursday’s statement will give little insight into the Reserve Bank’s view of how the Labour-NZ First-Green Government will affect the economy.

With many aspects of economic policy still vague, the Reserve Bank will ‘‘stress policy uncertainty and the need to await more detail’’, UBS economist Robin Clements said.

But the Reserve Bank hinted in September that its growth forecasts were likely to be cut, even before calculating the impact of Ardern’s plans to cut immigration.

In August, outgoing governor Graeme Wheeler delivered a rosy picture for growth, expected to climb to 3.8 per cent by the start of 2018, while inflation was tipped to drop below 1 per cent.

UBS predicted growth was likely to be closer to 3 per cent, while ANZ chief economist Cameron Bagrie also predicted growth forecasts would be pared down.

Meanwhile, the outlook for inflation has moved significantly since the Reserve Bank predicted in August that it would drop to 0.7 per cent.

Bagrie said that given the weaker dollar, surprisingly strong inflation in the September quarter and the likelihood that Government spending would be looser than what Treasury forecast before the election, the Reserve Bank’s inflation forecast ‘‘now looks unrealistic’’.

The New Zealand dollar may recover from its post-election plunge, which coincided with a sharp fall in business confidence.

BNZ head of research Stephen Toplis said in a note on Friday that the market was over-reacting to the uncertainty.

But he warned the policies of the new Government were likely to be inflationary, and that its borrowing was likely to be ‘‘substantially higher than suggested’’.