RBNZ meeting this week - no change is expected - preview 5

The Reserve Bank of New Zealand monetary policy meeting is this week

• Announcement due Thursday 11 May (local NZ time)
• Announcement due 2100GMT on May 10
• The current official cash rate is 1.75%
• As well as the OCR announcement there will be an accompanying Monetary Policy Statement & media conference

ANZ preview:

• The RBNZ will once again leave the OCR at 1.75%
• A view shared by the consensus and market
• And while there may be some tweaks at the margin, we expect the overall tone to remain balanced, watchful and cautious
• The day we see a shift to a formal tightening bias is coming, but we still think that is down the track and not this week.
• Numerous recent developments are consistent with the next move in the OCR being up and a tightening bias being needed (and therefore inconsistent with the RBNZ's explicit neutral tone of there being an equal chance of a hike or a cut).
• Headline inflation is back above the target midpoint for the first time in over five years and some measures of core inflation are also back at 2%
• Additionally, inflation expectations have lifted, the fiscal stance is shifting more neutral (after dragging), capacity utilisation is at all-time highs, the labour market continues to tighten and the NZD TWI is 4 1/2% below the RBNZ's February forecasts.
• Activity gauges point to a decent pace of underlying economic growth momentum (and stronger than Q4).
• It is a backdrop that has left the market happy to test the idea of hikes.
• By February next year, a hike is around 80% priced. We also see the next move in the cash rate being up, but slightly later (May). However, we doubt the RBNZ is ready to embrace an outright tightening view yet- Despite the positive overall tone to economic developments, it has not been one-way traffic, and we suspect there has been enough in the detail of recent data to leave the RBNZ happy to stay patient.
• The lift in core inflation is not unanimous (its Sectoral Factor Model remains glued to 1.5%, highlighting the idiosyncratic elements to the lift in headline inflation), and wage growth remains benign. We have been here before and broader inflation pressures have failed to materialise.
• Given its two failed attempts at tightening since the financial crisis, the RBNZ will want to see actual evidence of higher core and wage inflation before reacting. This is especially the case as financial conditions and a turn in the credit cycle buy the RBNZ time.
• The RBNZ is also being more active with regards to prudential policy beyond LVR's (i.e. a review of bank capital requirements), which will interact with monetary policy.
• Globally, reflationary-type signals are showing signs of spluttering, with commodity prices on the skids of late, and that will do little to allay the RBNZ's overall cautiousness towards the global scene.
• The RBNZ will need to make some mark-to-market moves within its forecasts, given a starting point of higher inflation and lower growth.
• The lower NZD will provide an additional boost to its tradable inflation forecasts too.
• Changes on the growth front are likely to be more mechanical than anything else, with a positive outlook retained.
• We suspect accompanying scenarios will still point to both up and downside risks.
• Projected OCR hikes will be brought forward (from late 2019 to the start of 2019 or even late 2018) and the endpoint raised 20 odd basis points, with the inflationary maths of a lower NZD needing to be reflected on the rates front. That in itself is likely to get the market a little excited even though it implies hikes are still a way off.
• More broadly though, the message should still be that policy is on hold for a while yet, with a cautious and balanced tone. We suspect the RBNZ will retain its view that policy will remain accommodative "for a considerable period". However, that's a phrase open to plenty of interpretation when you eye levels versus the change. Technically you could lift rates three times in the next year and the level of the OCR would still be "accommodative"! So it's a phrase you can drive a bus through. And what exactly "considerable period" means no one knows either.
• We can't see the RBNZ matching market expectations and bringing forward rate-hike projections from late 2019 to early 2018. Rather, we see late 2018 / early 2019 as its likely central scenario. That is far enough into the future that the phrase "considerable period" can be retained in our eyes. It doesn't need to be dropped just yet, but it is on borrowed time. But the RBNZ will need to give itself some wiggle room.
• Risks to the policy outlook certainly exist, but they are looking far from balanced. Some acknowledgment of this is needed within the assessment. The challenge for the RBNZ will be achieving that without the market jumping on it as a full blown tightening bias, which as mentioned we don't believe it is ready to (or should) embrace just yet.
• So with regard to how the market may react, the risk-return looks to be that subtle shifts are taken hawkishly. That might be right technically, but not the overall spirit of what we suspect the RBNZ will be hoping to convey. But as we know, markets like to jump on small shifts in numbers and words.

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I've posted other previews for this week's RBNZ meeting earlier:

• RBNZ meeting this week - no change is expected - preview 4
• RBNZ meeting this week - no change is expected - preview 3
• RBNZ meeting this week - no change is expected - preview 2
• RBNZ meeting this week - no change is expected - preview

And:

• An RBNZ 'preview' from NZ shadow board - recommend a tightening bias