RBNZ raises OCR to 3.00%, signals go-slow

The RBNZ (Reserve Bank of New Zealand) increased the official cash rate at its July meeting 25bps to 3.00%, and signaled that further rate rises will likely be on the go-slow. It noted that policy normalization may be more moderate going forward, but of course with the caveat of monitoring the economic environment and financial market developments:

"Given this, some further removal of monetary policy stimulus is appropriate at this stage. Even after today’s move, the level of the OCR is still very supportive of economic activity. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement. Our policy assessment will be continually reviewed in light of economic and financial market developments."

Indeed, this is probably the correct approach as the policy rate is still well below average, and is certainly in the stimulus zone, but against a backdrop of still subdued economic activity (recovery yes, but below trend, yes too). The New Zealand economy is in recovery mode and is growing, but is still dealing with the damage from the global financial crisis and the deep recession; as well as a spate of finance company collapses, beginning prior to the crisis and still continuing (the banking system remains firmly intact though, as none of the finance companies were particularly systemically important - but a lot of investors got burned).

"In New Zealand, domestic demand is subdued. Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak. While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued."

On the inflation front though, the headline inflation rate is widely expected to temporarily spike above 3% as government related price changes e.g. GST come into force. However the RBNZ does not expect this to translated through into core inflation, but there is the risk that firms and households raise their inflation expectations as a result, and that could lead to more genuine inflation. So the outlook seems fairly predictable for New Zealand, the main wild-cards come from abroad, both upside and downside.

Sources
Econ Grapher Analytics www.econgrapher.com
Statistics New Zealand www.stats.govt.nz
Reserve Bank of New Zealand www.rbnz.govt.nz

Article Source: http://www.econgrapher.com/29jul-rbnz.html

New Zealand Inflation Snapshot

New Zealand released its inflation figures for the March quarter showing an apparent bottoming out of inflation as the economy recovers from a recession of 5 negative GDP growth quarters. As GDP growth has now turned positive, monetary conditions remain loose, and spending is tentatively recovering inflation is likely to at least be under-pinned if not increases slightly.


Into the detail; the main inflation figure was 2% year over year, on a quarterly basis it was up 0.4% since December, below consensus estimates for 0.6% (compares to 0.3% in March 09, and -0.2% in December). Looking through to the "tradeables" and "non-tradeables", annual tradeables inflation increased to 2% from 1.5% in December, while non-tradebles slowed to 2.1% from 2.3%. So basically non-tradeables are slowing their decline and tradeables are continuing to increase.


In terms of the inflation outlook however, it is going to be very much effected by artificial factors such as government policy e.g. ACC levy increases, the emissions trading scheme, and possibly the GST increase when it comes. That said there continues to exist spare capacity in the economy, and the unemployment rate is still 7.3% (compared to a low of 3.5% in December 2007). In addition housing market inflation isn't likely to make a significant contribution in the near term.

Thus the figures are unlikely to cause huge concern to the RBNZ in terms of monetary policy. However there is the risk that the artificial inflation gets passed on into inflationary expectations and expressed as real inflation. The next key data point out of New Zealand will be the (albeit lagging indicator) HLFS [Household Labour Force Survey] on the 29th of April which will provide an update on the employment situation.

Sources
Econ Grapher Analytics www.econgrapher.com
Statistics New Zealand www.stats.govt.nz
Reserve Bank of New Zealand www.rbnz.govt.nz

Article source: http://www.econgrapher.com/21apr-nzinflation.html

Top 5 Graphs of the Week - 23 January 2010

The past week was reasonably quiet on the economic data front outside of China's big statistics release. As such this week's issue is less power packed than usual, but still contains a few gems. First up we look at how US PPI figures point to inflation, UK consumer spending's gradual recovery, UK inflation risks, New Zealand consumer spending trends, and the inflation outlook for New Zealand. If there were two main themes it would be that inflation is ticking along but not yet significantly, and that consumer spending is slowly recovering but well below trend.

1. US Inflation - Producer Price Index
US headline PPI came in at 4.7% year on year (2.7% in November), Core was also up but less so at a 0.9% annual increase. On a monthly basis it was slightly above consensus at 0.2%, and core was unchanged. Much of the increase was driven by food prices, and of course the high year on year % change being boosted by a lower comparison figure. All up the message is that prices have been tracking up, and it's unsurprising to see producer prices rise in the context of the level that the prices index of the ISM PMI has been at. This adds to the overall inflation picture for the US that says inflationary pressures are slowly simmering under the surface, but have yet to truly boil over...



2. UK Consumer Spending
The UK saw a monthly increase in retail sales for December of 0.3%, below an expected 1.1%. On an annual basis for December retail sales were up 2.1%. The biggest contributor to the gains were sales in "predominantly food" stores. The UK will be the first G7 country to announce its Q4 GDP result on the 26th of January. With retail sales figures for the December quarter up vs the September quarter consumer spending is likely to contribute. Consensus is for about 0.4% quarter on quarter growth.



3. UK Inflation
Keeping with the UK, the inflation story unfolding there had a some easily misleading additions in December. The annual rate of inflation measure by CPI was 2.9% (vs 1.9% in November). The biggest driver of this was the reduction of the VAT tax in 2008 to 15% from 17.5%. It was also boosted by a sharp fall in oil prices around December 2008, and Christmas sales pushing down prices. Overall the situation is inflationary in the UK, there are elements in the system like quantitative easing, that bar a severe downturn, will likely trickle through into higher real inflation. This will particularly be the case should activity in the UK begin to pick up further, as the recovery unfolds in the UK, the Bank of England will indeed face a dilemma and a challenge.



4. New Zealand Consumer Spending
New Zealand recorded a 4th month of monthly growth in retail sales in November with 0.8%, and 0.8% for core (less autos). On an annual basis headline was up 1.7%, and core was up 3.6%. As can be seen in the chart below core retail sales have been tracking up and have not been too significantly impacted by the recession, however headline retail sales are clearly growing below trend. Overall it is a positive figure and suggests the positive (albeit small) GDP growth figures recorded in Q2 and Q3 may be developing momentum. December quarter retail sales are due out next week and will give a fuller picture as to how the consumption component of GDP is tracking, likewise international trade figures are also due for December next week.



5. New Zealand Inflation
New Zealand also released its inflation figures last week, revealing reasonably subdued inflation. The figure came in at 2% year on year (-0.2% on a quarterly basis) for Q4 (vs 1.7% in Q3); in the middle of the 1-3% inflation target band of the RBNZ (New Zealand's central bank). On components, transport prices were a contributor, while food prices (esp. vegetables) fell the most. Non-tradeables (core) continued to decelerate with 2.3% vs 3% in Q3. The outlook is for reasonably stable inflation over the medium term, but with potential to pick up as house prices recover and the economy picks up pace. The RBNZ is likely to hike rates from 2.5% (having lowered from 8.5%) sometime around the middle of this year.



Summary
The main takeaways from this article are that inflation is present in the US, but it is still largely bubbling away below the surface - so the growth-inflation trade off is set to become increasingly important in the US. On the UK, inflation seems to be a bigger risk than in the US, particularly given that consumer spending; while not growing rapidly by any means, is beginning a slow recovery - against the backdrop of quantitative easing and broadly loose fiscal and monetary policy conditions. While in New Zealand consumer spending is tracking upwards, yet below trend, and tentatively indicating a pick up in momentum of the recovery there. At the same time New Zealand isn't facing any significant inflationary pressure just yet, and while Australia has started tightening monetary policy; New Zealand probably wont until at least the middle of this year.

Sources:
1. US Bureau of Labour and Statistics http://www.bls.gov
2. UK Office for National Statistics http://www.statistics.gov.uk
3. UK Office for National Statistics http://www.statistics.gov.uk
4. Statistics New Zealand http://stats.govt.nz
5. Statistics New Zealand http://stats.govt.nz

Article Source: http://econgrapher.site1.net.nz/top5graphs23jan.html