Both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) will hike interest rates within the next 12 months, says TD Securities, but rather than the RBA kicking off proceedings as it previously thought, it’s now likely to be the RBNZ who goes first.
“We delay the starting point for our RBA tightening cycle from November 2017 to May 2018,” said Annette Beacher, chief Asia-Pacific macro strategist at TD.
“We maintain that the RBA should hike to attract much-needed offshore capital and address household imbalances (but).. the RBA is demonstrating extreme patience, supported by disappointing data flow in recent weeks.”
Specifically, Beacher says that recent weakness in household consumption levels, the largest component within the Australian economy, will likely see the RBA show caution, noting that this is contributing to a deceleration in retail price inflation and soft economic growth.
“Technology and intense competition have contributed to a steady lowering of retail price inflation in recent years, and online retail giant Amazon’s arrival is expected to keep downward pressure on prices for the foreseeable future,” she says.
“In addition, retail sales volumes were flat in the March quarter, a disconcerting start for bottom-up GDP forecasts.
“Since the GFC, private consumption growth has added around 1.5 percentage points to annual GDP growth, half the pace of the preceding decade, and a fraction of the pace usually seen during a robust dwelling construction cycle.”
According to ANZ’s economics team, weakness in household consumption will contribute to a sharp slowdown in economic growth in the March quarter with the bank forecasting a paltry increase in real GDP of just 0.1%.
If correct, that would see the year-on-year rate drop to just 1.5%, the weakest level since the September quarter of 2009.
While weakness in consumption and a willingness to see how recently-introduced macroprudential measures from APRA to slow housing credit growth to investors will see the RBA on hold until May next year, TD says that rates will be moving higher in New Zealand, and far sooner than what markets currently expect.
“In contrast, we bring forward the first RBNZ hike from May to February 2018 amid strong macro fundamentals and a regime change of RBNZ Governor towards well-known hawk Grant Spencer.”
Graeme Wheeler, the RBNZ’s current governor, will leave his post on September 26 this year, three days after the New Zealand general election. He’ll be replaced by Spencer, the bank’s current deputy governor, on an interim basis for six months as the RBNZ seeks a permanent replacement.
While Beacher says the change in TD’s RBA forecast will mean little for Australian rates markets and the Australian dollar, she thinks that an earlier-than-expected hike from the RBNZ will see a “significant reaction” in Kiwi rates markets.
“In the past two tightening cycles 2-year swap rates rose decisively well ahead of the first actual OCR [overnight cash rate] tightening,” she says.
“If history repeats, from current levels of 2.23%, 2-year swap rates could climb towards 3% by early 2018, just ahead of our expected February OCR hike to 2%.”
And that will also support the New Zealand dollar, she says.
“Not only will this put the NZD in a stronger position on its own merits, but it will also help reinforce its standing against the lower-yielding currencies,” Beacher says.
“With the Fed expected to take policy rates steadily higher from here, the NZD will soon be the only other G10 currency with a base rate above the United States.”
TD looks for the NZD/USD to finish the year at 71 cents, slightly above where it currently trades at .7022. It also expects the AUD/NZD to retreat to 1.03, down from 1.06 at present.
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