ANZ Data Wrap

ANZ Data Wrap is a weekly report containing reviews and previews of the latest economic indicators and financial market developments.

2021 editions

15 October 2021: Inflation – surging into the summer (PDF 55KB)
Data this week continued the theme that COVID restrictions are, on net, a supply shock. Indicators of economic activity were soggy, while price pressures continued to build. Of note, food prices rose for the sixth month in a row in September – a time when they usually fall. Looking ahead to next week, Stats NZ release Q3 CPI data. We’re expecting a 1.8% q/q (4.5% y/y) increase in consumer prices, along with a strong underlying inflation impulse that should make the RBNZ more confident that hiking the OCR last week was the right call. And inflation looks like it will get worse before it gets better, with Christmas demand for inventory running straight into already stretched supply chains. Meanwhile, downside risks to employment build every week we remain at heightened Alert Levels – raising the chances of an ugly tradeoff for the RBNZ between supporting employment, or subduing inflation.

 

8 October 2021: Tough choices ahead for the RBNZ (PDF 532KB)
For the first time since 2014 the RBNZ lifted the Official Cash Rate (OCR) this week, increasing it from the record low of 0.25% to a still-low 0.5%. The RBNZ again acknowledged that capacity constraints are a concern for meeting their mandate right now. That was reinforced by Q3’s QSBO data - we haven’t seen shortages of supply or labour being this much of a constraint in New Zealand since the 1973 oil crisis. But it’s going to get harder from here: inflation risks are to the upside, while growth risks are to the downside as lockdown and restrictions drag on, and vaccination remains below par. The RBNZ could end up facing a tough trade-off between supporting growth or controlling inflation. But that trade-off is the reason why central banks were made independent in the first place.

 

1 October 2021: Higher interest rates just around the corner (PDF 552KB)
The RBNZ meets next week for the October Monetary Policy Review. We think they will lift the OCR 25bps to 0.5%. We hold that view with some conviction – a 50bp hike would be inconsistent with their measured approach in the face of uncertainty, while not hiking would only exacerbate the risks of persistently overshooting their targets. Meanwhile, August filled jobs data showed that jobs increased by 0.7% m/m (3.9% y/y), despite the country spending half the month in Level 4 lockdown (figure 1). That suggests firms are once again adjusting hours worked, rather than letting staff go, which bodes well for a rapid labour market recovery once restrictions ease.

 

24 September 2021: Bird watching and lending restrictions (PDF 548KB)
The domestic data calendar was fairly light this week. Of note was the August read of the Services PMI, which fell sharply to 35.6 (55.9 previously). Combined with the Manufacturing PMI, which fell to 40.1 (from 62.2), it’s another reminder of the heavy cost of lockdowns. There’s been some progress, with Auckland moving to Alert Level 3 and Level 2 restrictions being relaxed slightly for the rest of the country. But with daily cases still in double digits, it’s uncertain how quickly we can keep moving down levels.

 

17 September 2021: Rolling with the punches (PDF 504KB)
The economy has continued to demonstrate resilience in the face of the current lockdown. This week, the flash estimate of our September Business Outlook saw a net 18% of firms expecting to increase their activity over the next 12 months. Meanwhile, FOMO is alive and well in the housing market - house prices posted a 1.9% m/m rise in August, despite lockdown. But headwinds are blowing strongly now, and we expect the housing market will eventually run out of steam. Q2 GDP data confirmed that the economy was surging over mid-2021, with the economy expanding a whopping 2.8% q/q. And while to some extent that’s old news given lockdown, early indications are that the economy has handled the current restrictions much better than in 2020. That should see the economy rebound quickly in Q4.

 

10 September 2021: Old news, but good news (PDF 504KB)
This week the majority of the country moved down to “Delta Level 2”, and case numbers have continued to fall in Auckland. An October OCR hike remains firmly on the table, although it’s still very uncertain whether the RBNZ will be able to complete their hiking cycle. With the Government increasing their spending capacity, that could make monetary policy normalisation more achievable. Q2 GDP is released Thursday next week – we’re expecting a solid 1.2% q/q increase. Of course, given recent developments it feels like old news. We’ll be watching household incomes closely over the next few quarters, hoping to see a similar level of resilience as we saw in 2020 (thanks to the fiscal support).

 

3 September 2021: Keeping calm and carrying on (PDF 580KB)
With all of New Zealand except for Auckland now moving down to Alert Level 3, we’re starting to see the light at the end of the Lockdown tunnel. Case numbers, business confidence, and card spending data all suggest we’ve handled it pretty well so far – fingers crossed that continues. So it’s looking like October is still game on for the RBNZ to begin the OCR hiking cycle that was so rudely delayed by the current outbreak. But it’s worth remembering there’s still a lot that has to keep going right between now and October before hikes are locked in. Building work put in place next week will give us another piece of the Q2 GDP puzzle piece. We’re expecting a 4% rise in building activity, reflecting surging consents, concrete production, and construction intentions.

 

20 August 2021: Lockdown stymies OCR hike (PDF 536KB)
It was bound to happen at some point. Delta, the extremely infectious variant of COVID-19, has finally found its way into the New Zealand community. With just 23% of the population fully vaccinated, an aggressive public health response is needed to protect us – so we now find ourselves back in Level 4 lockdown. Of course, the main headline this week was meant to be the RBNZ raising the OCR for the first time since 2014. On the day, because it was the first day at Alert Level 4, RBNZ decided to not rattle the cage, given an already rattled population, and kept the OCR on hold. So what happens now? If this lockdown proves short, we doubt it will have much of an impact on the aggregate economy. But everything is in flux at this point, and the health and fiscal responses now take centre stage. The Delta variant has proven to be extremely aggressive and hard to contain – so fingers crossed that our early and tough lockdown proves as effective as it did in 2020.

 

13 August 2021: Countdown to hikes (PDF 548KB)
The RBNZ will release the August Monetary Policy Statement on Wednesday next week at 2pm. We expect the OCR to be lifted by 25bps to 0.5%. This is an event to mark in your diary, as it’s the first OCR hike since 2014. The Government has announced the plan for how we gradually open up to the rest of the world. It’s going to be a slow process and widespread vaccination progress will be key. House prices continue to defy expectations, with prices up 2.0% m/m in July – over 30% y/y.

 

6 August 2021: Labour market power shift (PDF 508KB)
Labour market data this week confirmed that the economy has flown past full employment, with unemployment dropping to 4.0% in Q2, and wages up sharply. The RBNZ is overachieving on both sides of the dual mandate, and they need to remove emergency OCR cuts quickly to mitigate boom-bust dynamics in the economy. We suspect the best is yet to come for the labour market – with unemployment to drop below 4%, and wage pressure to build over this year.

 

30 July 2021: Data confirms strong Q2 for jobs (PDF 552KB)
Cost of living indexes continue to show life is getting tougher for those with low incomes, as the Commerce Commission shines a harsh light on supermarkets. All eyes are turning to the labour market data release next week, with jobs filled data this week confirming that employment grew strongly over Q2.

 

23 July 2021: Strong inflation just beginning (PDF 516KB)
For the first time Statistics NZ have published a quarterly data series for the income measure of GDP. These data show how the wage subsidy, as expensive as it was, supported households through lockdown. Household net disposable income dropped just 0.1% q/q in 2020 Q2, despite a 10.7% q/q fall in overall income GDP during the quarter. We also updated our inflation forecasts this week in the wake of Q2’s 3.3% y/y rise in consumer prices. The broad-based momentum in the inflation numbers shows that strong CPI prints have only just started, and we’re expecting that inflation will peak at 4.2% y/y in Q3 2021. We still expect inflation to slow over the next few years, as supply disruptions and other temporary factors ease, and the RBNZ raises the OCR (starting in August).

 

16 July 2021: Monetary policy turning point (PDF 548KB)
The monetary policy cycle has reached a turning point, with the RBNZ announcing an end to the LSAP, headline inflation at 3.3% y/y, and core inflation measures hitting (and some exceeding) the top of the RBNZ’s 1-3% target range. OCR hikes are needed to cool down an overheated economy. We expect that starting with the August 2021 MPS, the OCR will gradually be lifted from the current low of 0.25%, to a peak of 1.75% at the end of 2022.

 

9 July 2021: Hikes on the horizon (PDF 556KB)
This week we brought forward our expectation for interest rate hikes. We now expect the OCR to be increased to 0.50% in the November 2021 meeting, with further hikes at each MPS until we reach a terminal OCR of 1.75% in early 2023. The QSBO reinforced what we’ve seen in our monthly Business Outlook – the economy is running red hot. Looking ahead to the Monetary Policy Review we expect a significant change in tone in the RBNZ’s Record of Meeting, acknowledging the strength in the recovery, and the intense capacity pressures building across the economy. Timely indicators from our capacity pressure suite show that pressures are building in line with what we predicted in our Quarterly Economic Outlook. All up, it’s time for the RBNZ to start removing stimulus.

 

2 July 2021: Capacity pressure as far as the eye can see (PDF 520KB)
Data flow continues to point to an economy that’s in a very strong cyclical position. The economic expansion appears to be well into the inflationary zone, as labour shortages, shipping delays, and other COVID-related disruptions continue to bite. As we explored in an Insight published yesterday, these disruptions are unlikely to fade anytime soon. The housing market is also still in the vice of strong demand and weak supply. Data released by Realestate.co.nz this week showed available listings continuing to grind downwards in June. That caps off a first half of 2021 where listings were well below levels seen even during the depths of lockdown in 2020. This week we published an upgrade to our labour market forecast. This reflects strong recent data, including the large 1.6% q/q rise in Q1 GDP, record-high job vacancies, strong increases in monthly filled jobs, and the near-constant flow of news articles highlighting the struggles Kiwi businesses are facing trying to find enough workers to be able to operate. If unemployment falls to 4.5% in Q2, as we expect, that would imply historic levels of labour market tightness, given super strong job vacancies.

 

18 June 2021: Strong GDP brings rate hikes closer (PDF 556KB)
What happened this week? The Q1 GDP figure blew every market forecast out of the water. Our expectation (shared by the market) was for a 0.5% q/q rise, while the RBNZ expected a 0.6% fall. On the day GDP rose 1.6% q/q, with GDP now comfortably above pre-COVID levels (although still below a counterfactual where COVID never happened). The rise in GDP confirms that New Zealand has seen a spectacular economic recovery, and while there is residual weakness in industries exposed to international tourism, this is being swamped by domestic momentum. As a result, we have changed our OCR call. We now expect the first OCR hike to take place at the February 2022 MPS, followed by hikes in the May and November 2022 and May 2023 meetings. These four hikes would bring the OCR up to 1.25% in mid-2023.

 

11 June 2021: Survey says inflation (PDF 532KB)
What happened this week? The preliminary read of the June ANZ Business Outlook showed further evidence that New Zealand’s economic recovery is running into capacity constraints – ie we’re trying to grow faster than available resources and COVID disruptions will allow. This is feeding into higher prices and costs for firms, and we expect strong inflation prints over 2021 (peaking at 3.0% y/y in Q3). What are we watching? Next Thursday, GDP data for Q1 2021 are released by Stats NZ – see our Preview. We think that production GDP increased by 0.5% q/q, after a 1.0% fall in Q4.

 

4 June 2021: Inflation is coming (PDF 496KB)
Building work put in place (WPIP) for Q1 was released today. It lifted 3.7% (following a 0.5% contraction in Q4). This is normally a pretty reliable indicator for construction GDP. However, that wasn’t the case with the Q4 GDP release, where the 8.7% q/q fall in construction activity was much weaker than WPIP was suggesting. This week we released our Quarterly Economic Outlook. The New Zealand economy is well on the way to recovery. While some sectors are still suffering, others have bounced back so rapidly that they’re now running into severe capacity constraints. As a result, we think that the New Zealand economy overall currently has a positive output gap – that is, it is trying to grow faster than available resources can sustain. A positive output gap generates inflationary pressure – and that’s why we expect that headline CPI inflation will peak at 3.0% y/y in Q3.

 

28 May 2021: Return of the OCR track (PDF 500KB)
The RBNZ left monetary policy settings unchanged this week, with the OCR at 0.25%, and the LSAP and FLP programmes untouched. That was universally expected. The big news was the reinstatement of the OCR track. We had been hoping to see this, especially since the RBNZ’s previous forward guidance had expired. And the RBNZ well and truly delivered, publishing an OCR track very similar to ours. As expected, the RBNZ’s forecasts have been upgraded to reflect the improved economic outlook since the February MPS. The labour market is much closer to full employment than they were expecting, and like us, the RBNZ thinks that unemployment has already peaked. That said, the RBNZ is forecasting a slower decline in the unemployment rate than we are – we think that unemployment will be around 4% by the end of 2023, versus the RBNZ’s forecast of 4.3% by mid-2024. Overall there’s probably upside risk to their labour market outlook, and this tilts the risks to a slightly earlier date for the first OCR hike.

 

21 May 2021: Balancing the books after COVID (PDF 484KB)
This week the big event was Budget 2021. The Budget showed that the Government is looking to balance rebuilding fiscal buffers and addressing significant issues facing New Zealand. The Treasury’s economic forecasts were revised upwards, reflecting the improved economic outlook since the Half Year update in December. This has provided the Government with more room to spend money on key projects, whilst also staying on track to stabilise debt levels. See our Review for more details. The May Monetary Policy Statement will be released on Wednesday next week (May 26). The RBNZ is unlikely to shift from their cautious stance just yet – they remain data driven, and while we have seen encouraging signs of economic recovery, the RBNZ will want to see a few more strong data prints to be sure the economy is on track to meet their inflation and employment objectives. That said, we think conditions will continue to improve, and enough so that the RBNZ will feel comfortable starting to raise interest rates from August 2022. Encouragingly, indicators from our ANZ Business Outlook, the PSI and PMI are all pointing to economic momentum building over mid-2021.
PMI, PSI, and GDP growth.

 

14 May 2021: Is housing momentum finally slowing? (PDF 436KB)
What happened this week? Yesterday’s April house price data was the first chance to see the impacts on the red-hot housing market of the Government’s housing policy changes. As it happened, house prices rose 1.7% m/m, down from 2.8% previously (ANZ seasonal adjustment). And the number of houses sold dropped 12.8% m/m. Overall, that points to some softening in housing activity, but prices (which lag sales) have a bit more momentum than we had pencilled in. That doesn’t mean that the impact of the policy announcements is smaller than we had expected. A single data point is just the opening bid. There’s a lot going on, and we’ll need to keep our finger on the housing pulse for a while yet. But we have tweaked our house price forecast to take into account the stronger starting point (figure 1). The fundamentals of the housing market continue to suggest a moderation in house price growth from here: affordability constraints, mortgage rates that are more likely to go up than fall further, loan-to-value ratio restrictions back and bigger than ever, building consents at historical highs, and population growth that’s severely curtailed by the border closure.

 

7 May 2021: A stronger outlook for employment (PDF 528KB)
What happened this week? The Household Labour Force Survey lived up to its reputation for delivering surprises, with the unemployment rate falling from 4.9% in Q4 2020 to 4.7% in Q1 2021. The details of the data were very robust, and a stronger-than-expected 0.6% q/q rise in employment saw the unemployment rate fall, despite a rise in participation to 70.4% (70.2% previously). Consequently, we’ve upgraded our labour market outlook. There was a lot of genuine strength in the release, and it looks like jobs growth will just about be able to keep pace with higher labour force participation over 2021. Consequently, we expect that the unemployment rate will hold steady at around 4.7% over the rest of 2021 (figure 2). This reflects our expectation that further strong employment gains will be hard won while the border remains closed, due to matching issues, and employment growth is likely to drop to low (but positive) levels over H2. Combined with a slight uptick in the participation rate to 70.5% in Q2 (vs 70.4% in Q1), this sees the unemployment rate drift sideways for the next 12 months.

 

30 April 2021: Hold on to your hats, it’s a busy week ahead (PDF 484KB)
Q1 labour market statistics will be front and centre next week. We expect to see a small lift in the unemployment rate to 5.1%, but the participation rate is a bit of a wild card and the possible range of outcomes is wide (table 1). The details of these data will be important. A tick down in the unemployment rate alongside weak participation would suggest there could still be some way to go towards recovery, while a higher unemployment rate coupled with markedly higher participation and solid employment growth would suggest a more advanced recovery. Looking forward, the RBNZ will be assessing a range of measures, such as the underutilisation rate. They’ll require broad-based improvement across the suite of indicators they monitor before concluding employment is at or above its maximum sustainable level. A positive surprise in the Q1 data is extremely unlikely to go that far.

 

23 April 2021: CPI - Petrol and housing pump up price (PDF 436KB)
This week Stats NZ released CPI inflation data for Q1. Consumer prices rose 0.8% q/q (1.5% y/y) vs our expectation of a 0.7% q/q rise (figure 1). The outturn was more or less as expected, with temporary drivers pushing the headline number higher. This data underscores the need for patience, as the RBNZ has been saying for some time now. The details show that temporary factors are supporting prices, and core inflation measures may not be the most reliable guide right now. And, as the RBNZ emphasised in the recent Monetary Policy Review, they want to see evidence that CPI inflation will be ‘sustained’ at 2%, and the Monetary Policy Committee is anticipating a ‘prolonged period of time’ before conditions are in place for this. We’ve updated our inflation forecasts to account for two factors. Firstly, tradables inflation was stronger than expected in Q1 (a technical change). Secondly, continued labour market pressure has led us to revise up our near-term non-tradables and wage inflation forecasts. As we noted in a recent Insight, labour shortages remain acute in New Zealand, despite the unemployment rate still being above pre-pandemic levels. And, demand for labour has only increased, with job-ads now at record highs less than a year after a recession.

 

16 April 2021: RBNZ on hold ahead of CPI data (PDF 484KB)
What happened this week? The RBNZ met this week and, as expected, made no changes to policy settings. The RBNZ reiterated its wait and see approach, including on the likely effects of housing policy and travel bubble announcements.
What are we watching? CPI inflation for Q1 is released on Wednesday. As we outlined in our Preview, we think consumer prices rose 0.7% q/q (1.3% y/y). That’s off a 0.5% q/q rise in Q4. The bottom line is we don’t expect the data to be a game changer for the RBNZ. Of particular note was MBIE job vacancies data for March – this data can be volatile, but even when we smooth it, we’re looking at a record high for the series.

 

9 April 2021: Travel bubble unlikely to disturb the OCR’s slumber (PDF 444KB)
How has the view changed? On Tuesday the Government announced the opening of a travel bubble between New Zealand and Australia from 19 April. This is fantastic news for families and friends who have been kept apart for a year, Kiwis desperate to get out and about, and tourism firms who have battled through a summer without international tourists. Wednesday next week will be the RBNZ’s first opportunity to comment on the state of the world since the February MPS. As we outlined in our MPR Preview yesterday we’re expecting that the Monetary Policy Committee will reiterate their “wait and see” approach.

 

1 April 2021: In the vice; construction and capacity constraints (PDF 484KB)
How has the view changed? This week we've been keeping an eye on indicators of activity in the construction sector. While timely indicators for this sector can be pretty noisy, we're seeing an emerging risk that residential building has been more constrained by supply and capacity pressures than we previously thought. The construction sector has been the star performer of New Zealand's post-lockdown economy, driving economic momentum forwards. But with the sector running into serious capacity headwinds, there's a question around whether this momentum can be sustained. To start with, our recent Business Outlook showed that pricing intentions and cost expectations in the construction sector continued to grind higher in March, whilst confidence, activity, employment, investment, and profit all declined - clear signs of hitting some kind of constraints. It's not unusual for construction sector firms to get into trouble during very busy times due to stretching themselves too thin, but the supply shortages we're seeing - and in particular, the associated project delays - could cause considerable cash-flow pain. Once capacity constraints start to grip the sector, rising costs can seriously impact the bottom line, especially for larger multi-unit developments.

 

26 March 2021: House price outlook slightly weaker (PDF 392KB)
How has the view changed? Of the Government's suite of housing policy announcements this week, the removal of interest deductibility on investment property is the one that surprised us - it's bold. We doubt we'll see a sudden flood of sales as investors run for the hills en masse. The peak impact on property investors likely won't be until year 5, because the policy will be phased in over four years. But, it's true that buying a new investment property today is less appealing and riskier than it was last week. And the highly leveraged investor has been top bidder at a lot of auctions lately. All up, we expect this to take the wind out of the housing market's sails (and sales) faster than we previously thought, but we think there's enough competition out there to prevent a complete landslide. For annual house price inflation, we now expect a peak of just under 25% mid-year (about 2%pts lower than previously) and a faster decline from there.

 

19 March 2021: Down but not out: GDP falls in Q4 (PDF 376KB)
How has the view changed? This week Stats NZ released GDP data for Q4. It was always a toss-up whether we would see the economy expand or contract. On the day, GDP declined 1.0% q/q against our expectation of a 0.5% rise. That's definitely a sizeable negative surprise, but it's not enough to change our overall view of the economic outlook. The real challenge is trying to work out how much of a signal to take from this data. The data is still pretty noisy under the hood, and it looks like some of the drop in Q4 came from industries experiencing a technical retracement from their record rises in Q3. But it's also true that the headline numbers are probably understating the degree to which the economy was hurting over 2020. When we compare what actually happened in 2020 with a counter-factual scenario in which COVID never happened (figure 1), we estimate that the economy is around 5% smaller than it would have been.

 

12 March 2021: Housing market tightens further in February (PDF 420KB)
This week REINZ data for February showed that the housing market is still running hot. House prices surged ahead 3.7% m/m, with annual house price inflation now sitting at 19.4% y/y (3mma). Notably, average days to sell declined to 26 – a record low for this data, which goes back to 1992. This indicates that housing inventories are extremely stretched by strong demand. The robust outturn presents upside risks to our house price forecast and the broader economic outlook. We expect that unaffordability, high debt levels, the re-imposition of LVRs, credit constraints, and high levels of residential construction activity will see house price inflation cool down over 2021 – but the timing and extent of this is uncertain. In the meantime, the strong domestic housing market continues to support activity in the wider economy.

 

5 March 2021: Dairy strong, capacity biting in construction (PDF 404KB)
How has the view changed? The new COVID-19 outbreak was on everyone's minds this week, with Auckland back into Level 3 and the rest of the country in Level 2. While as of yesterday there had been no new community cases in four days, the recent lockdowns remind us that New Zealand's stellar economic recovery is extremely fragile until herd immunity is achieved and the risk of returning to lockdown fades. While lockdown dampened the mood domestically, our global commodity prices defied gravity. The ANZ World Commodity Price Index rose 3.3% m/m in February - and even more gains were seen this week. In the GlobalDairyTrade auction, whole milk powder prices rose a whopping 21%, supporting a 15% rise in the overall GDT price index. Consequently, we revised up our farmgate milk price forecast for the 2020-21 season to $7.70/kg MS.

 

26 February 2021: RBNZ holds; bond bear market escalates (PDF 420KB)
How has the view changed? The Minister of Finance announced yesterday that housing would be added to the RBNZ’s Financial Stability Remit, stating that, ‘the Bank will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers.’ The Minister has asked the RBNZ for advice on debt-to-income limits and interest only loans, which could lead to the RBNZ’s macro-prudential powers being beefed up. But these appear likely to apply to investors only. When setting monetary policy, the RBNZ will also have to “assess” the impact on housing sustainability. That means the interaction between monetary policy settings and housing is likely to become a more prominent part of RBNZ communications, but it won’t have a meaningful impact on policy settings.

 

19 February 2021: Hold the line - RBNZ to stress challenges ahead (PDF 432KB)
How has the view changed? Hold the line. That’s been the theme within our internal discussions as we’ve worked to digest the data flow and separate noise from signal. Higher house prices remain a massive driver of domestic momentum at present, but sales have shown some signs of returning to more normal levels, albeit from a pretty nutty place last year. That’s in line with our assumption that house price inflation will slow this year to something around average, as policymakers try to engineer a soft landing and as affordability and credit constraints bite. A weak PSI number this week confirmed all is not well in services industries, and soft migration data once again reminded us that we cannot rely on population-led growth to support GDP. But another strong GlobalDairyTrade result offered some relief and added further justification for the elevated NZD. Then there’s the renewed lockdown measures. A short, sharp lockdown like we’ve seen shouldn’t cause too much of a loss in broader activity, but some (namely Auckland hospitality) will certainly feel it more than others. And another round remains an ever-present risk. None of the new news above challenges our broader macro view, but it all goes to show that this crisis is pushing and pulling the economy in many directions – and it’s not over yet.

 

12 February 2021: RBNZ tightening a way off, but housing market poses risks (PDF 408KB)
How has the view changed? Although data volatility is still expected, the dust has settled sufficiently to see how resource pressures are faring and, as such, we have updated our ANZ capacity suite. Consistent with our view that more stimulus is not required, our estimates of the degree of resource pressures in the economy suggest that in aggregate the economy is operating with only a little spare capacity – though clearly experiences across the economy are very varied. This picture is far better than the RBNZ dared hope three months ago, reflecting a much greater surge in demand out of lockdown than anticipated, while the economy continues to grapple with supply constraints. We expect the RBNZ to remain cautious, looking for assurance that its targets can be achieved sustainably, especially given closed-border headwinds and downside risks to the outlook. But clearly, the economy is much closer to full employment than the RBNZ ever envisaged, and that does raise the spectre of policy normalisation in time. We think that the RBNZ will want all its ducks in a row before embarking on this process, with employment, inflation and inflation expectations sustainably near target, and downside risks having abated. That will take time. At this stage, we see tapering of LSAP purchases as the first part of this process, potentially in the second half of 2022 based on current forecasts. See our ANZ Insight – the path to normal for more details.

 

5 February 2021:  RBNZ has done enough, but won’t want to spook the horses (PDF 408KB)
We no longer expect the RBNZ to cut the OCR again this cycle, with the economy more resilient than previously believed. This view reflects a range of factors, but especially a better starting point for the labour market. Recent developments take further monetary stimulus off the table, provided downside risks do not materialise, with the outlook for inflation and the labour market looking even more assured (see Economic Forecasts). The RBNZ will want a high degree of certainty about sustainably reaching its goals, which speaks to policy being on hold for a long while (including an extension to the timeframe of the LSAP programme – which implies a slower pace of asset purchases, but importantly, also gives the RBNZ optionality). But for now, the RBNZ has done enough. 

 

29 January 2021: Better labour market outlook sees RBNZ on track (PDF 404KB)
How has the view changed? Recently we updated our forecasts to reflect stronger economic momentum into 2021, which means a better outlook for the labour market too. Better prospects for inflation and the labour market tilt risks away from further monetary policy easing. But we haven’t seen the peak in unemployment yet, and continued caution is warranted. Headwinds to the economic outlook, especially related to the closed border, are expected to weigh on employment this year, with the unemployment rate expected to peak near 6% in mid-2021. We expect the RBNZ will extend the LSAP guidance in February, affirming forward guidance that monetary conditions will remain expansionary for some time. Although the data is yet to show it, we are assuming these headwinds will become more evident in time, motivating the RBNZ to cut the OCR once more ‘for luck’ to 0.1% in May. However, this may not be deemed necessary if the strong data run continues.

Improvement in the labour market is expected to be gradual until herd immunity is reached and the border opens, with faster declines in the unemployment rate possible once economic activity normalises and the recovery accelerates and evens out. Down the track, once the RBNZ’s targets are in sight, policy normalisation will be on the cards. There is significant uncertainty when looking that far into the future, but tightening in monetary conditions may be able to start by mid-2023 based on our current forecasts, and upside risks could see this happen sooner.

 

22 January 2021: Solid CPI but more noise to come (PDF 408KB)
How has the view changed? Today’s Q4 CPI data were stronger than expected, with a solid 0.5% q/q lift. We’ve updated our forecasts for the starting point. Volatility in annual inflation is expected in coming quarters, due to recent noise. As we expected, scarcity of goods resulted in pockets of price pressure in Q4 on the back of rising shipping costs and supply disruption – in fact, this impact was even greater than we expected. But these impacts are expected to be transitory and the RBNZ will look through them, plus they aren’t great for growth. Over the medium term, our forecast for a gradual lift in underlying inflation remains the same – with a strong NZD, fragile global backdrop and domestic challenges (like the closed border) providing headwinds. Encouragingly, though, core inflation measures have generally lifted. Although these may ease from here, this is good news for the RBNZ. A stronger underlying pulse is supportive of inflation expectations and a better starting point makes returning to target just that bit easier. We expect the RBNZ will remain cautious about downside risks, but they may not need to cut the OCR further if momentum in the economy can be maintained. Indeed, the housing market could tip the balance there. We’ve recently added a little more oomph into our outlook for house prices, but a picture that is even stronger than we expect could tip the balance away from a further OCR cut in May.

 

15 January 2021: Better outlook supports OCR call change (PDF 408KB)
How has the view changed? We now expect only one more OCR cut in May to 0.1%. That means a negative OCR is now off the table unless downside risks materialise. Underpinning our updated call is a stronger starting point and outlook for the economy (see Economic Forecasts). The economy bounced strongly (14% q/q) in Q3, and we now expect a little more momentum on the back of a stronger housing market (see our ANZ Property Focus out next week), business resilience and higher export prices, including a better milk payout. This means that there is less spare capacity in the economy than previously feared, meaning fewer job losses. We now expect the unemployment rate to peak at a lower level (6% versus 7%). The medium term outlook for inflation is also looking more assured on stronger GDP and improving inflation expectations. Still, the starting point is low and improvement will be gradual. In this environment, it will take some time for the RBNZ to be confident that it will meet its targets, justifying a little more stimulus, especially as the economy experiences a wobble into 2021. Strategically this is consistent with the RBNZ’s ‘least regrets’ approach. That said, should the economy maintain momentum, it would be easy to make a case for no further cuts at all.