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28 Dec 2015
NZ Monetary policy: Risks skewed to lower for longer – Goldman Sachs
FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that against the backdrop of such benign inflation dynamics, slower growth and a slight rise in unemployment – we do have sympathy with the view that the RBNZ could cut rates a few more times this cycle.
Key Quotes
“On balance, however, we think the most likely scenario is that just one further -25bp reduction is delivered (in December 2015), before an extended period of unchanged policy.”
“The rationale for this view is partly the tentative evidence that the profound easing in financial conditions delivered by the RBNZ to date has put a floor under the growth slowdown – even if the growth outlook remains unspectacular. In addition, we are also cognizant that several other factors weighing on policy-makers minds, including:
The RBNZ desiring to retain some flexibility (ie, “powder dry”) in the event of an unexpectedly large slowdown in growth in NZ’s two major trading partners – China and Australia. The risks to growth in both economics remain skewed to the downside.
Concerns at the RBNZ about the systemic risks posed by the rapid growth in NZ house prices. In an October speech, Governor Wheeler highlighted the strengthened focus on financial stability since the 2012 Policy Target Agreement, stressing that “housing market considerations do influence our thinking on the OCR”. With recent data suggesting a renewed acceleration and broadening of house price growth, issues of financial stability have arguably raised the hurdle for further easing.
Reinterpretation of mandate?: The reality is that inflation has undershot the midpoint of the RBZ’s target band now over 4 consecutive years, and Governor Wheeler has given no indication that he intends to attempt to correct this in a hurry. To the contrary, in an October speech he pushed back against an effort to “immediately correct deviations of inflation from its target range” in favour of doing so “steadily over time”. This lack of urgency, alongside “RBA-like” commentary on the “limits” of monetary policy to deliver sustainable growth, suggest that the RBNZ will likely only ease rates quite reluctantly from this point.”
Key Quotes
“On balance, however, we think the most likely scenario is that just one further -25bp reduction is delivered (in December 2015), before an extended period of unchanged policy.”
“The rationale for this view is partly the tentative evidence that the profound easing in financial conditions delivered by the RBNZ to date has put a floor under the growth slowdown – even if the growth outlook remains unspectacular. In addition, we are also cognizant that several other factors weighing on policy-makers minds, including:
The RBNZ desiring to retain some flexibility (ie, “powder dry”) in the event of an unexpectedly large slowdown in growth in NZ’s two major trading partners – China and Australia. The risks to growth in both economics remain skewed to the downside.
Concerns at the RBNZ about the systemic risks posed by the rapid growth in NZ house prices. In an October speech, Governor Wheeler highlighted the strengthened focus on financial stability since the 2012 Policy Target Agreement, stressing that “housing market considerations do influence our thinking on the OCR”. With recent data suggesting a renewed acceleration and broadening of house price growth, issues of financial stability have arguably raised the hurdle for further easing.
Reinterpretation of mandate?: The reality is that inflation has undershot the midpoint of the RBZ’s target band now over 4 consecutive years, and Governor Wheeler has given no indication that he intends to attempt to correct this in a hurry. To the contrary, in an October speech he pushed back against an effort to “immediately correct deviations of inflation from its target range” in favour of doing so “steadily over time”. This lack of urgency, alongside “RBA-like” commentary on the “limits” of monetary policy to deliver sustainable growth, suggest that the RBNZ will likely only ease rates quite reluctantly from this point.”