Thursday, September 16, 2010

RBNZ Holds OCR at 3.00%, Notes Earthquake Impact

The RBNZ (Reserve Bank of New Zealand) left the OCR (Official Cash Rate) unchanged at 3.00%, leaving banks' core overnight funding costs unchanged. The decision was expected by most, with most economists in New Zealand expecting the next move not to come until as late as December this year.

The RBNZ also released its detailed economic analysis report; the Monetary Policy Statement, where it outlined its views on the New Zealand economy and rationale for the decision. The Bank noted that (as with the expectations of those in the market) further tightening of monetary policy is likely to be more drawn out:
“Over time, it is likely that further removal of monetary policy support will be required. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.”

The New Zealand Economy
In its assessment of the New Zealand economy the RBNZ noted the likely impact of the Christchurch earthquake (see below for more details), but it also honed in on the slowing of the pace of the global economic recovery; in particular in the US. But pointed out that New Zealand's key trading partners; China and Australia are both growing strong and will likely support demand for exports.

However the RBNZ did note the decline in the outlook for the household sector as deleveraging runs its course; thus resulting in a relatively subdued housing market and lackluster consumer spending. On the inflation front, unsurprisingly the RBNZ did not see significant underlying inflationary pressure, but did note the likelihood of a spike in short-term inflation.
“Overall, despite the weakened outlook, we still expect that growth will progressively absorb current surplus capacity over the next few years. In addition, changes to indirect taxes and earthquake impacts will cause headline inflation to spike higher over the coming year. Previous experience of GST increases, the fact that annual CPI inflation has been near 2 percent for the past year and a half, and the subdued state of domestic demand suggest this inflation spike will have little impact on medium-term inflation expectations."

Earthquake Impact
The RBNZ noted the potential economic impact of the 4th of September earthquake (7.1 magnitude). The earthquake significantly damaged buildings and infrastructure, and thus will have a short term negative impact on the economy; but over the medium term it is expected that there will be a net benefit to the economy with insurance payouts and reconstruction stimulating the faltering building and construction sector.
“The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to continue to do so for some time yet. Many homes and businesses have been damaged, as have significant parts of Canterbury’s public infrastructure. Eventual reconstruction and repairs will require considerable resources over the next year or two, particularly in the construction sector. If, in the aftermath of the earthquake, the prices of some goods and services increase temporarily, monetary policy would remain focused on the medium-term trend in inflation. The Policy Targets Agreement explicitly instructs the Bank to look through temporary price increases generated by a natural disaster."

Overall the RBNZ confirmed my previous suspicion that tightening would be on the go-slow for the rest of the year with perhaps only one more 25bp increase. As far as the New Zealand economy is concerned, the recovery is still relatively well entrenched, but GDP growth is likely to come in slower in the second half of 2010. There may well be a few quarters of slower growth, but 2011 promises to bring stronger growth as the economy rebounds driven by exports, earthquake rebuilding in Canterbury, and the 2011 Rugby World Cup.

In terms of gaining exposure to the New Zealand economy, you can play the volatile NZD exchange rate, or invest in one of the New Zealand ETFs e.g. iShares MSCI New Zealand Invest (ENZL), Wisdom Tree Dreyfus New Zealand Dollar (BNZ), or through one of the ETFs listed on the New Zealand Stock Exchange ( such as the top 50 stocks fund (; or of course directly into stocks listed on the NZX or dual listed on the ASX.

Econ Grapher Analytics
Reserve Bank of New Zealand
Statistics New Zealand

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