Reserve Bank of New Zealand Rate Decision

A Preview

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate new-zealand-economy

Looking at economic factors

While markets prepare again for another RBNZ decision with speculation of a cut, a number of economic factors are working in favor and against a decrease. The 90 day Bank Bill and Overnight rate are correctly positioned, New Zealand’s House Price Index Q V Q is running above 1year, 5 and 96 month averages and is currently at the highest levels in 31 months, while annual averages trade above a long-term trend line dating to December 1990, but remain below the 1 and 5 year averages.

Mortgage interest rates however are at the highest levels while two year Fixed Rate Mortgages are bumping against 1 and 5 year averages. CPI and NZD exchange rates Real and Nominal on a Trade Weight basis are all severely below trend. Below trend CPI is not the factor of Petrol - although it assisted - but rather trends are found in the Inflation Tradables and Non Tradables. Tradables are the current driving force to lower OCR or remain on hold despite Real GDP at above trend growth.

Economies commonalities

GDP above current growth rates is found the commonality in all central banks and in all economies. Current Real GDP annual averages in New Zealand, Europe, US, and the UK are all running above long term trends while Australia is bumping against 1 year averages. Japan just lifted off from zero growth to achieve above trend readings. For New Zealand to sustain GDP growth, the relationship between tradables and non tradables must meld in relation to export prices and exchange rate levels.

The RBNZ highlighted both aspects in the April 30 Statement. Current export prices for an export-oriented economy as New Zealand are at a severe disadvantage in relation to the exchange rate. Before export prices and exchange rates settle however Inflation Tradables Vs Non Tradables must be addressed first because that is where is found prices and demand within New Zealand. If the Tradable and Non Tradable relationship deviates further to cause weak demand in New Zealand then the RBNZ faces a must cut situation to spur growth. Both relationships, Export Prices Vs Exchange rates and Tradables Vs Non Tradables, are a polemic but in the short to medium term and not yet a cause to lower OCR for the next quarter especially when the 90 Day rate is correctly positioned.