WELLINGTON: New Zealand's central bank is set to raise interest rates for a fourth consecutive meeting this week but is expected to signal it will pause its tightening as it balances sliding commodity prices, rising inflation and a high flying currency.
The country has been growing at close to 4 percent a year on the back of earthquake reconstruction projects in the Canterbury region, a strong housing market, booming commodity prices, and increasing migration.
That has sent annual inflation up to 1.6 percent in the second quarter, from around 0.7 percent in the year-ago quarter, prompting the Reserve Bank of New Zealand to start tightening policy.
The RBNZ has made it abundantly clear it intends staying ahead of the curve to keep a lid on growing inflation pressures, having tucked 25-basis point rises in March, April, and June under its belt.
Thirteen of 16 economists polled by Reuters expect a further hike to 3.50 percent on Thursday, and financial markets are pricing in an 82 percent chance of a rate rise.
The bank finds itself with a dilemma of how to drive policy, because it knows rising rates burnish kiwi's appeal as a high yielder, making life difficult for exporters. Conversely, it does not want investors to think it's going soft on tightening. "The higher than expected NZ dollar puts the RBNZ between the rock and a hard place," said ASB economist Christina Leung.
"In the current environment it can only choose one, and we expect the RBNZ to choose maintaining a floor under mortgage rates (by raising rates)."
The New Zealand dollar remains 1 percent above the RBNZ's June forecast, having come within sight of the 29-year post-float high earlier this month, before a modest retreat in the face of weaker commodity prices and risk aversion.
But it has remained largely immune from the impact of a 34 percent slide in dairy prices since February, as the currency's yield appeal, and the economy's solid growth have attracted investors.
The RBNZ has repeatedly said it wants a lower currency and higher interest rates, and that the kiwi's level is a factor in how far and how fast the cash rate is raised. All of this has led to a scaling back of market pricing for future rate hikes since the June rate rise, with an implied 67 basis points of tightening seen over the next 12 months from 80 basis points after the statement.
The Reuters poll forecasts one further 25 basis point rise in the second half with the cash rate seen at 3.75 percent at year-end.
RISKS CONTAINED - FOR NOW
The RBNZ's brief statement is likely to acknowledge the recent easing in commodity prices, high currency and mixed economic data.
Since the June monetary statement house prices have shown further signs of levelling out under the impact of lending limits, business sentiment has eased, and commodity prices, especially dairy, are off multi-year highs.
Conversely, migration gains were at an 11-year high in June, which worries the RBNZ because of the potential boost to domestic demand, particularly housing.
And with annual inflation forecast to reach the mid-point of the central bank's 1-3 percent target band by the middle of next year, most analysts say the RBNZ needs to stick to the tightening path it has clearly signalled in previous statements.
"This week's announcement is as much about the Bank completing its strongly-indicated first phase of stimulus removal - in order to guard against medium-term inflation pressures and risk," said Bank of New Zealand senior economist Craig Ebert, adding that the economy has been performing broadly in line with the RBNZ's June forecasts.
The June forecasts reaffirmed an expectation of two more rate hikes this year, which have been taken to mean one this week and a further one in December.
The issue for the RBNZ is what message it gives to allow a pause in the tightening, without undoing the work it has already done.
"We fully expect an extended pause to eventuate post this week's decision, but the RBNZ won't explicitly say that, rather they will stress that everything will be data dependent from here," said ANZ's analysts in a note.
Comments
Comments are closed.