The Ready Reckoner quantifies the impact of the various ‘shocks’ that have hit the New Zealand economy since the last Monetary Policy Statement, in terms of the likely impact on the RBNZ’s interest rate forecast. The sensitivities represent our best estimate of how the RBNZ’s models will treat the various data surprises.
The November Monetary Policy Statement projected an Official Cash Rate of 1.7% (rounded to one decimal place), suggesting a mild chance of a further easing but otherwise consistent with the OCR remaining on hold for an extended period. Developments since then have been mixed, with higher inflation and commodity prices, but tighter than expected financial conditions. On balance, these developments don’t suggest that the RBNZ will need to change its policy bias one way or another in February.
The Ready Reckoner is intended to be a pure read on how new information will affect the RBNZ’s forecasting model. But there’s an unavoidable element of judgement around it this time, particularly for export prices and bank funding costs as discussed below. Consequently, the margin of uncertainty around our estimate is greater than it has been for recent decisions.
November MPS implied OCR forecast (Q4 2018): 1.7%
Net impact of shocks since November: 0bp
Ready Reckoner estimate of new OCR forecast (Q1 2019): 1.7%
Near-term inflation: +10bp
The CPI rose 0.4% in the December quarter, compared to the RBNZ’s forecast of 0.2%. Most of the surprise was in tradables, which has a more muted impact on the interest rate projection.
Near-term GDP: 0bp
The 1.1% increase in September quarter GDP was above expectations, but this was offset by downward revisions to the first half of the year. Recent activity indicators have been firm and give little reason for the RBNZ to revise its near-term growth forecasts, which were already quite strong at 1% for each of the next two quarters.
World output: 0bp
World growth forecasts are little changed in the last three months. Forecasters have generally not bought into the ‘Trump reflation’ idea.
House prices: -10bp
In the November Monetary Policy Statement, the RBNZ made only a small downward revision to its house price forecast following the latest round of loan-to-value ratio (LVR) restrictions. Since then, house price growth has slowed by more than expected: the RBNZ assumed a 3% rise over the December quarter, but monthly sales data suggests an increase closer to 1%.
Labour market: -5bp
The RBNZ was expecting the unemployment rate to fall to 4.7% by the March quarter. The increase to 5.2% in the December quarter suggests more slack in the labour market than thought. Unemployment is only one of several measures of capacity that the RBNZ uses, so surprises will normally have a small impact on the interest rate projection.
Net migration: +5bp
Net inflows surged higher again in the December quarter. However, migration has not proved to be much of an inflationary force in the current cycle, and the RBNZ has significantly downgraded its impact on the interest rate projection.
Export prices: +40bp
World dairy prices rose sharply ahead of the November Monetary Policy Statement, and have risen modestly further since then. The RBNZ did not incorporate the rise in prices in its November forecasts, but acknowledged that the longer that dairy prices remained at these levels, the more it would have to factor them into its forecasts. Our estimate of the Ready Reckoner impact assumes that the RBNZ will now adopt a forecast similar to our own, which incorporates a modest pullback in prices this year. This one is particularly hard to quantify, as it rests on a judgement about existing information, rather than on new information.
Exchange rate: -20bp
The trade-weighted index is tracking around 4% above what the November MPS assumed for this quarter. About half of this can be justified by the modest rise in export commodity prices since November, but the other half would be considered a ‘portfolio effect’ that is not based on fundamentals.
Funding costs: -20bp
Bank funding costs have risen since the November OCR cut, due to a rise in global long-term interest rates and increased pressure for banks to attract deposits. Mortgage rates have also risen, by around 10 basis points for floating and between 20 and 50 basis points for fixed-term rates. Funding costs aren’t explicitly captured in the RBNZ’s model, but in scenarios it has indicated that unexpected changes in funding costs would be offset nearly one-for-one with changes in the OCR track. The tricky part here is to what extent the RBNZ will judge the increase in funding costs to be a surprise; at the least, the rise in floating rates (which rarely change outside of OCR moves) will be treated as such.
Total change: 0bp