The Reserve Bank of New Zealand monetary policy meeting is this week

  • Announcement due Thursday 11 May(local NZ time)
  • Announcement due 2100GMT on May 10
  • The current official cash rate is 1.75%
  • As well as the OCR announcement there will be an accompanying Monetary Policy Statement & media conference

Westpac's preview (in brief, any bolding is mine, party for formatting purposes & partly for emphasis):

OCR expected to left unchanged

  • Expect the bottom line to be along the lines of: "Monetary policy will continue to be accommodative, to ensure that medium-term inflation remains near the 2 percent midpoint of the Reserve Bank's target range"
  • We expect the RBNZ's interest rate projections to be more consistent with an OCR hike by late 2018
  • This would probably be neutral for financial markets on the day: an earlier start than previously signalled, but stopping short of endorsing market pricing for a hike by March next year

In a speech in March, RBNZ Governor Wheeler concluded that the risks around the OCR were evenly balanced, with downside risks from the global environment but upside risks from the domestic economy.

  • In particular, the Governor emphasised the uncertainty around the Trump administration's policies, and the risk of a marked rise in trade protectionism.
  • The RBNZ's concerns about the global backdrop will probably remain. Forecasts of world growth have generally been revised up in recent months, but inflation (setting aside the rebound in oil prices over the last year) remains subdued.
  • Moreover, US government policy is perhaps even more worrying now - the odds of a large fiscal stimulus in the near term are growing dimmer, while the risk of a wave of trade protectionism is very much at the forefront.

On the domestic front, the biggest development for the RBNZ is that inflation has risen much quicker than the RBNZ expected.

  • After lingering at near-zero levels for much of the last two years, annual inflation rose to 2.2% in the March quarter - well ahead of the RBNZ's forecast of 1.5%, and a level that it hadn't expected to see for several more years.

To date the RBNZ has treated the housing slowdown as temporary, "given the continued imbalance between supply and demand"

  • But the evidence is now too strong to dismiss
  • While the RBNZ may be pleased to see a cooling in the housing market from a financial stability perspective, it presents a real challenge on the monetary policy side
  • The RBNZ's forecasts have relied on strong household spending, supported by rising house prices, to drive economic growth and a lift in domestic inflation.
  • In February the RBNZ forecast an 11% rise in house prices this year; so far it's tracking in the low single digits.
  • And that already seems to be having an impact on consumer spending - for instance, card spending on durable goods has fallen in five of the last six months.

With inflation back on track earlier than expected, the RBNZ will no doubt be weighing up when it can start 'normalising' interest rate settings.

  • But we're wary that signalling too much in the way of rate hikes at this stage could push retail interest rates and the exchange rate higher, undermining the growth that the RBNZ is relying on to meet its inflation target.