- New Zealand economic growth, inflation and unemployment data has all smashed expectations over the past couple of months.
- Given the recent data flow, it makes the Reserve Bank of New Zealand’s November interest rate decision on Thursday all the more interesting.
- Just six weeks ago the bank said the next move in official interest rates could be up or down, making it potentially the most dovish developed central bank in the world right now.
Suddenly, the most anticipated central bank decision over the next couple of days might not actually be from the US Federal Reserve.
Separate data on wage expectations for the year ahead also rose sharply last quarter, hitting the highest level since 2014.
For a central bank that previously suggested the next move in official interest rates could be either up or down, the Reserve Bank of New Zealand (RBNZ) is now in a somewhat tricky situation.
Given recent data on inflation and labour market conditions, how can it maintain the view that interest rates could be cut even further?
It will be difficult, meaning there’s a good chance its monetary policy statement and updated economics forecasts released on Thursday are likely to convey a more upbeat message than the case just six weeks ago.
Should such an outcome occur, it carries the potential to generate some big movements in New Zealand financial markets, especially the New Zealand dollar which has already surged to the highest level in three months today against the greenback.
The message will have to be spot on to prevent a large and abrupt switch in mindset towards the outlook for policy settings.
“The screws have tightened a little further on the RBNZ’s decidedly dovish view,” says Jarrod Kerr, Chief Economist at Kiwibank.
“The purple patch of cool Kiwi data takes the risk of an overnight cash rate cut off the table.”
With employment surging in the three months to September, contributing to the plunge in unemployment despite an increase in the size of the labour market, Kerr says the RBNZ is already achieving its policy mandate of maximum levels of sustainable employment, meaning it will be the bank’s message on inflation that could determine how big any potential market reaction may be.
“Local economic data of late indicates some upside to near-term inflation. We would expect the RBNZ to acknowledge these developments, including today’s data, stronger-then-expected Q2 GDP growth, CPI inflation well ahead of the Bank’s August forecasts, and an exchange rate that has weakened,” he says.
“Inflation is coming, and wage growth is ready to play its part.”
While Kerr expects those trends will come to the fore next year, he says the RBNZ will likely maintain a cautious tone, retaining the view that the direction of its next cash rate move could be “up or down”.
“The RBNZ is keen to see how growth evolves as we move through 2019,” he says.
“We see the next move by the RBNZ being a hike, and one that is delivered around May 2020 — six months or so earlier than the bank is currently signalling.”
Like Kerr, Strategists at TD Securities also believe the RBNZ won’t ditch the view that official rates could move in either direction, warning that “this will be too hawkish too soon and NZD and swap rates will jump beyond comfort levels for the RBNZ”.
“The RBNZ needs to acknowledge that activity is much stronger than expected only three months ago, and so the rate cut scenario has morphed from realistic to a distant tail risk,” TD says.
The RBNZ will release its November monetary policy statement, including updated forecasts, at 9am on Thursday in Wellington (7am AEDT).
That will be followed by a press conference from RBNZ Governor Adrian Orr one hour later, another event that carries the potential to generate financial market volatility.