RBNZ: Not jumping at inflation shadows - AmpGFX

Analysts at Amplifying Global FX Capital explain that despite the jump in New Zealand’s headline inflation in Q1 to 2.2%y/y, rising above the mid-point of the 1 to 3% target, well above the 1.5%y/y forecast made in the February MPS, the RBNZ has made little adjustment to the path of inflation in its three-year projections. 

Key Quotes

“It has forecast it to fall back to 1.1%y/y in Q1 next year, rising to its 2.0% target in Q2-2019.”

“In his press conference, RBNZ Governor Wheeler said that “we are not seeing the build-up in inflation pressures that some other commentators are seeing.”

“In particular, the RBNZ and Wheeler see little inflation pressure coming from abroad.  The Monetary Policy Statement (MPS), “assumed slowing in the pace of recovery in global oil prices and a subdued outlook for global inflation more broadly.”

“Wheeler sees low wage inflation a global conundrum, even where labour markets have tightened.  He said, “We have seen little sign if wage inflation. And the same is the case in many countries that have full employment: Japan, Germany, and the US arguably – you’re not seeing significant wage inflation coming through.  Some of them are struggling to explain why wage inflation is so low.”

“Despite a number of special factors that suggest the Q4 GDP report significantly underscored the strength in the economy, the model drive RBNZ downgraded its assessment of used capacity in the economy (its output gap). Wheeler said, “Output growth in the second half of last year was weaker than what we were expecting… so we think there may be a bit less capacity pressure than we thought.”

“In discussing underlying inflation trends, the RBNZ paid less attention to the rebound in the trimmed mean and weighted median.  It paid more attention to the more stable ‘sector factor model’

“Wheeler said, “If you look at core measures of inflation, they are running around 1.5 to 2.2.  The measure that we put quite a lot of emphasis on is the factor model, which is at 1.5 and it has been at 1.5 for some time.” (it has been stable at this level for 5-quarters since Q4-2015).”

“Wheeler added that, “Non-tradable inflation is rising only slightly at this point, and we have seen a significant slowdown in house price inflation.”

“All of that suggests we are not going to see a burst of inflation in this economy.”

“That’s the main reason why we have kept the neutral stance, we just don’t see the need to change that stance at this point.”

“We are neutral on monetary policy and for the foreseeable future we expect to see the OCR stay at its current level.”

Assistant Governor, John McDermott added that “we still think that underlying inflation is moving very slowly.”