Fonterra had some more good news for dairy farmers this week, though we’d caution against extrapolating too far from recent dairy price gains. The RBNZ signalled that it’s on track for a November OCR cut.
Statement by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.0 percent.
Global growth is below trend despite being supported by unprecedented levels of monetary stimulus. Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation. Volatility in global markets has increased in recent weeks, with government bond yields rising and equities coming off their highs. The prospects for global growth and commodity prices remain uncertain. Political uncertainty remains.
Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate. The trade-weighted exchange rate is higher than assumed in the August Statement. Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector. A decline in the exchange rate is needed.
Second quarter GDP results were consistent with the Bank’s growth expectations. Domestic growth is expected to remain supported by strong net immigration, construction activity, tourism, and accommodative monetary policy. While dairy prices have firmed since early August, the outlook for the full season remains very uncertain. High net immigration is supporting strong growth in labour supply and limiting wage pressure.
House price inflation remains excessive, posing concerns for financial stability. There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence.
Headline inflation is being held below the target band by continuing negative tradables inflation. Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation. Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations.
Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data.
Prepared by Jane Turner, ASB Senior Economist
Key highlights
RBNZ left the OCR unchanged at 2% at the September OCR review, as widely expected. However, the RBNZ did deliver a clear message that it anticipates cutting at least once more – helping correct market pricing for rate cuts (which had drifted higher in recent weeks) and helping nudge the TWI lower. The statement was as we expected and largely similar to August’s. A key focus was the RBNZ’s language on the NZD – which is that it still needs to be lower despite the RBNZ conceding that some of the recent lift is warranted by higher dairy prices.
The RBNZ appears fairly wary of recent data upsides. This likely reflects the fact that inflation risks remain so heavily skewed to the downside and as a result the RBNZ does not want to place too much weight on stronger growth when inflation pressures are still surprisingly weak. Recent GDP growth figures were deemed ‘consistent’ with expectations, so the RBNZ is not banking too much upside from the positive revision. Likewise, the RBNZ took a conservative approach to the dairy price outlook as it remains early days in the season (in contrast we remain very confident that recent price gains will be sustained).
From our perspective, a November OCR cut is largely a done deal. The RBNZ maintained a strong easing basis (further policy easing will be required). Furthermore, inflation risks remain skewed to the downside so it seems fairly unlikely for data to outperform to such an extent the RBNZ refrains from cutting further. Also, the RBNZ learned the hard way that by opting to delay a cut (as it did in June) risks losing credibility with the market and seeing the NZD higher (all else equal).
How future economic data evolve will influence the probability of further cuts early next year. The RBNZ was 50/50 on this risk back at the August MPS, and the tone of the September statement suggests this balance of probabilities has not altered significantly. The key events ahead of the RBNZ’s November MPS include CPI (18th October), inflation expectations (Consensus Economics mid-October, RBNZ Survey 2nd November) and Q3 labour market data (2nd November). In addition to these releases, the path of the TWI will also be a key driver of policy as well as any further stretch in funding costs (see chart of the week).
The NZ economic calendar is fairly quiet over the next few weeks. On Friday we get another monthly read on building consents and business confidence. Business and consumer confidence are both now gradually improving – and encouraging sign that RBNZ stimulus is gaining traction. Next week’s Quarterly Survey of Business Opinion will provide more additional insights into business conditions over the September quarter. Key metrics such as difficulty of finding labour and reported price/cost increases will be closely scrutinised by the RBNZ before the next full review of its own economic forecasts.
Migration is booming, with a net inflow of over 69,000 migrants (125,000 gross arrivals) over the past year, according to Statistics NZ data. That’s putting pressure on housing and infrastructure. But when you look at the fuller picture, including the number of permanent resident approvals (the aim of which has not really altered from 45-50k per annum), the story does appear less alarming. A German au pair, for instance, doesn’t have the same impact on the property market as a permanent resident. New Zealand’s economic and political credentials currently look pretty good. Because of that, we don’t believe net migrant inflows are going to cool aggressively any time soon, in the absence of policy intervention. Skill shortages will worsen as the population ages, so New Zealand needs to import labour. However, it is questionable whether current policy settings have got the ‘mix’ right and are achieving the desired outcomes. Sub-par GDP per capita growth is telling, as is the mismatch between reported skill shortages and the skill sets of arrivals. It is also odd that more foreign students are heading into Private Training Institutes as opposed to Universities. In short, there are aspects that suggest the migration framework, and the application of the rules, could be in need of adjustment.
This week’s Overview is fairly short. We take a wee look at the way developments this week have generally been on the positive side for the NZ economy. Then we discuss the issue of freeing up cash in retirement by shifting to a location with cheaper housing, giving interested readers a link to help facilitate their search for such cheapness.
While residential properties are generally realising optimal sale prices after minimal days on market, the residential sector is dampened by a paucity of stock homes coming to market. Even with the average sale price of an Auckland home slated to hit one million in the coming week, prospective vendors are hesitant in listing knowing they are buying in the same super-heated market. In some parts of Auckland properties are appreciating up to $5,000 per week putting undue pressure on vendors to buy quickly. Multiple offers on a property is now the expected norm with more and more properties selling ‘off the plans.’
Demand grossly exceeds supply and this imbalance will not equalise until more land is unlocked or re-zoned for development and more dwellings constructed. While the AUP seeks to address these issues, immediate and tangible relief is still some time off. Some developers are shying away from building the ‘affordable housing’ designated under the AUP preferring the more lucrative returns from big ticket properties. Developers are also expressing concern over increasing construction costs, difficulty in sourcing developable land and difficulty in finding construction companies available to start projects.
Effects of the new LVR criteria (namely the 40% deposit requirement) are to a small extent being ameliorated as investors collaborate finances but overall the LVR criteria is perceived to be discouraging activity. Some prospective buyers report being discouraged from acquiring property as they perceive the 40% LVR will limit the buyer pool and reduce competition with negative implications for sale price.
In short, the market is as interesting and volatile as ever which only increases the requirement to engage expert services regardless of where you are located or your activity in the market spectrum.
