RBNZ Preview: Upgrading Economic Assessments to Reflect Stronger-than-Expected Recovery

Economic data released since the last meeting have continued to improve. We expect the RBNZ to upgrade economic assessments at the upcoming meeting, acknowledging recent positive developments. Yet, policymakers would continue to attribute the spike in inflation to temporary factors. All monetary policy measures will remain intact.

The job market has continued to improve. The unemployment rate slipped -0.2 ppt to 4.7% in 1Q21, beating consensus of +4.9%. The RBNZ had not anticipated to the rate to reach this level until 2023. The labor cost index gained +1.6% y/y during the period. On inflation, headline CPI climbed +0.1 ppt higher to 1.5% in 1Q21. From a quarter ago, the reading gained +0.3 ppt to 0.8%. Inflation expectations have soared.The preliminary ANZ Business Outlook Survey (BOS) (more below) revealed that cost and inflation pressures intensified and broadened. “Expected costs” gained +4 points to a net 80% of firms expecting higher costs ahead. A net 58% of respondents intend to raise their prices, a 2-point lift to a fresh record high. Inflation expectations increased +0.2ppt to 2.2%, slightly above the central bank midpoint target of 2%.

Leading indicators have projected strong economic growth in the first half of the year, the BOS showed that business confidence jumped +9 points to +7%, while the own activity outlook rose +10 points to +32.3%. Strong growth was broadly based, with export, investment and employment intentions, capacity utilisation, and profit expectations all up 4 to 10 points.Other leading indicators are also firm. For instance, the manufacturing PMI came in at 58.4 in April. While easing -5.2 points from March, the reading remained the second highest result since July 2020 when New Zealand came out of lockdown. As noted in the accompanying report, the Production (64.5) and New Orders (60.9) sub-indices continued to be the main drivers of expansion, while the Employment (52.7) and Finished Stocks (55.2) sub-indices remained at similar levels to March.Against this backdrop, we expect policymakers to acknowledge recent positive developments. Yet, they would continue to maintain a cautious tone, noting downside risks to growth. Vaccination in the country is at an early stage while the new Indian coronavirus variant is worrisome. Meanwhile, it remains uncertain on when international travel can be re-opened. Recent changes in government’s housing tax policy and tighter LVR restrictions would dampen investor demand from a prolonged period.

Balancing the upside and downside risks, we expect the RBNZ would maintain all monetary policy measures unchanged. The OCR should stay unchanged at 0.25%. On asset purchases, the LSAP program will also stay at NZ$100B while the Funding-For-Lending program (FLP) will remain in place.