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Michael Gordon

RBNZ Ready Reckoner, March 2017 OCR review

Michael Gordon

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 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 Official Cash Rate forecast. The sensitivities represent our best estimate of how the RBNZ’s models will treat the various data surprises. The Ready Reckoner is meant to be a pure read on the balance of recent data, and is not a prediction of the RBNZ's actions.

The February Monetary Policy Statement projected the OCR to remain flat at 1.8% (rounded up from 1.75%) for the next two years, with a small rise in the track after that. We read this as saying that the next move in the OCR was most likely to be up, but that it was too far away to be specific about the timing.

Developments since February have been mixed, with softer than expected activity in the near term, but stronger near-term inflation and a lower exchange rate. On the whole, there is little reason for the RBNZ to depart from its recent comments that the risks around the OCR are evenly balanced.

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February MPS implied OCR forecast (Q1 2019): 1.8%

Net impact of shocks since February: 0bp

Ready Reckoner estimate of new OCR forecast (Q1 2019): 1.8%

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Near-term GDP: -20bp

GDP grew by 0.4% in the December quarter, much less than the RBNZ’s forecast of 1.0%. In addition, September quarter growth was revised down from 1.1% to 0.8%. Some of the softness in the December quarter was due to temporary factors that are likely to be unwound in the March quarter. However, the RBNZ was already forecasting a strong 0.9% gain in March, suggesting limited scope for upward revisions.

Near-term inflation: +10bp

The RBNZ forecast a 0.3% rise in the March quarter CPI; we’re now expecting a 0.7% rise. The surprise has been in transitory factors (food and fuel), which have a more muted impact on the interest rate projection.

Export prices: 0bp

World dairy prices rose strongly through the second half of 2016, but have fallen by 11% since the start of this year. In recent statements the RBNZ has taken a cautious view on dairy, assuming that the sharp rise in prices would be short-lived. While the RBNZ has never been explicit about its dairy price assumption, we think that the recent decline has brought prices back in line with the RBNZ’s view.

Exchange rate: +20bp

The trade-weighted index is tracking below the February MPS assumption. Importantly, the RBNZ’s exchange rate forecast already incorporated a pullback in dairy prices, so the currency’s undershoot represents a positive surprise for the interest rate projection.

House prices: -10bp

The RBNZ expected house prices to be rebounding by this stage, with a 2.4% increase forecast for the March quarter. So far, prices are tracking closer to flat.

World output: 0bp

No significant change to consensus forecasts of world growth, although the risks of near-term deterioration have eased.

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Total change: 0bp

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