RBNZ: Conundrum intensifies - BNZ

Stephen Toplis, Head of Research at BNZ, suggests that they’ve got a sneaking feeling that the RBNZ may have a marketing headache ahead of it and if they are right with their near term projections then GDP growth will come out around half of what the RBNZ expects while CPI inflation will be more than double.

Key Quotes

“We’ll get the first leg of the double on Thursday of this week with the release of Q4 GDP. Try as we may we can’t produce a number anywhere near the 1.0% the RBNZ is projecting for the quarter. We, instead, are at 0.4%.”

“To be fair to the Reserve Bank, we have the benefit of having seen the partial indicators that go into the GDP calculation whereas the RBNZ’s figure was put to bed before any of these were available. So we are not criticizing the Bank’s forecast, per se, just noting that there is a very real chance that the published number may force the RBNZ into a rethink of sorts.”

“The RBNZ may choose to look through the higher-than-expected CPI but, if headline inflation prints at 2.0% two years earlier than the Bank projects, inflation expectations are likely to head higher too. Moreover, don’t forget that the NZD is currently 3.5% below where the RBNZ had assumed. If it stays here then this would add further upward pressure to the CPI in time.”

“The magnitude of our forecasts could well prove exaggerated when push comes to shove. But we are more interested in risks to the consensus and the RBNZ’s forecasts than the actual figures. With this in mind, it is very clear that there is one-sided risk to inflation (upside) and one-sided risk to GDP (downside). Not only will this be testing for the central bank but it will also be testing for markets. GDP comes out well before the CPI (due for release on April 20) and may provide the market with a short term dovish bias that won’t be supported when the inflation figures are released.”

“We remain very strong in our view that the RBNZ will be forced into tightening well in advance of its published track. We remain equally convinced that, contrary to the Bank’s recent comments, there is not equal risk that the next move in rates will be down as up. That said, the market is already priced for a rate increase well ahead of the RBNZ’s suppositions so the potential for it to price a more aggressive rate track than it already has is limited.”