Economic Update: RBNZ on hold with hope

The RBNZ kept the OCR on hold at 2.5% as we were expecting, in addition the tone of the RBNZ's statement delivered few surprises. The RBNZ acknowledged signs of so called green shoots, noting international economic activity is stabilising and international financial conditions are improving.

 The RBNZ also noted the recovery in the housing market and net migration.  Nonetheless, the RBNZ continued to emphasise the weak economic outlook and see risks remain weighted to the downside.  Inflation pressures are lower than previously expected and CPI inflation is likely to briefly fall through the bottom of the target band later this year.

In our view, the RBNZ's exchange rate assumption is too weak, and leaves the RBNZ vulnerable to the risk inflation falls uncomfortably low.  Going forward there are two key influences on the OCR outlook: downside risk to the RBNZ's outlook, but some acceptance that there is little the RBNZ can do about tighter monetary conditions except hope that they abate.  We still judge there is some chance of further OCR cuts, but increasingly that likelihood rests on when the RBNZ changes its view on the longer-term outlook for the NZ dollar.  This wont happen immediately.  We expect another pause in July, and have pencilled in two 25bp cuts in for September and October, although these are heavily dependent on the NZ dollar.

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This article has kindly been reproduced coutesy of ASB's iwantahome.co.nz

Posted: 13 Jun 2009

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