RBNZ: On hold this month, now expect a Q3 2018 hike - HSBC

Despite continued robust economic growth of New Zealand’s economy, inflation disappointed in Q2 and wages growth remains subdued and given limited inflationary pressures and a dovish central bank, analysts at HSBC now expect the RBNZ to lift its cash rate in Q3 2018 (previously Q1 2018).

Key Quotes

“Much like many other central banks, the RBNZ is grappling with below-target inflation and stubbornly weak wages growth. Some of this can be explained by global factors, such as technological change, casualization of the workforce and global trade in goods and, increasingly, in services.”

“However, for a while now, we have argued that there are also idiosyncratic factors at play. Specifically, we see low wages growth as partly the result of record inward migration, such that strong labour demand is met by ample supply. We have been forecasting a slowdown in arrivals, motivated by an improving Australian jobs market; however, new arrivals have surprised to the upside, hitting new record highs recently.”

“The measures of wages growth have also been weaker than forecast, partly as a result. This has, in turn, weighed on domestic inflation. Although core inflation has lifted over the past 18 months, Q2 CPI data were weaker than expected and all of the key core inflation measures slowed, as did non-tradable inflation.”

“In addition, the RBNZ has taken a very cautious tone, virtually ignoring the lift in many of the underlying inflation measures, and has indicated that higher rates are not on the agenda until inflation is sustainably back to 2%. In the past, the RBNZ would have sought to progressively remove monetary stimulus until the cash rate setting was at a ‘neutral’ level when inflation was back at target.”

“We have changed our view and now expect the RBNZ to be on hold until Q3 2018 (previously Q1 2018, a view we have held since December 2016). However, we still expect a hike in 2018, for the same reasons as before. We expect that inward migration will slow as the global labour market improves and this should put some upward pressure on wages growth over time. It’s just taking longer than we thought.”

“Fixed income and FX strategy: The NZD has rallied too far and too fast, leaving FX misaligned with rates. We expect NZD-USD to fall towards our year-end forecast of 0.70, and bond yields to stay low, with room for the long-end to outperform.”