ASB economists say RBNZ has 'already come unstuck' with forecasts of a lower dollar

ASB economists are sceptical that tradeable inflation will be “anywhere near as strong” as the Reserve Bank is banking on.

In ASB’s weekly economic bulletin, chief economist Nick Tuffley points out that the New Zealand dollar has gained 7% against its American counterpart in less than three weeks.

“In New Zealand, four consecutive price rises at the GlobalDairyTrade Auction have supported the NZD. Further, the NZD has then been pushed even higher by market participants delaying their expectations of the first Federal Reserve rate hike. Firstly, the Fed didn’t start raise rates in September. Secondly, the US Non-farm Payrolls reading on the 2nd October came in well below expectations. And thirdly, the Fed meeting minutes (released last week) were more dovish than market participants expected. Combined, these events saw market pricing of a Fed rate hike move well into 2016, suppressing the USD,” Tuffley said.

He said the RBNZ is forecasting that inflation will return to the mid-point of its inflation target (2%) by September 2016.

“However, this forecast is heavily reliant on a lower NZD on a trade-weighted index (TWI) basis. The RBNZ’s latest forecasts for the TWI have already become unstuck with the increase in the NZD. In fact, the TWI is currently sitting at 71.6, whereas the RBNZ’s forecast for the December quarter is an average of 68.

“This change in the direction of the NZD/USD means Friday’s CPI release will be closely watched. We are expecting Q3 CPI to deliver a slight fall in annual inflation to 0.3%. And, over the longer term, we are sceptical that tradable inflation will be anywhere near as strong as the RBNZ is banking on off the back of past and future falls in the NZD,” Tuffley said.

He said however that what the NZ dollar/inflation linkage means for the RBNZ’s October review of the Official Cash Rate is not straightforward.

“For one, in the September OCR review, the RBNZ stated that ‘further [NZD] depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices’. While this statement did hold firmly back in September, the subsequent and sharp increase in dairy prices recently has eroded the statement’s strength somewhat. So, while the importance of a lower NZD may not be as great from a commodity price respect, its importance for boosting inflation back near the inflation target remains high. The October OCR remains a close call, but the RBNZ risks missing its inflation target for even longer if it doesn’t cut the OCR and the NZD stays high.”

Meanwhile, ANZ released its monthly inflation gauge.

ANZ senior economist Mark Smith said prices rose in four groups, fell in one, and were unchanged for the remaining three.

A 6% rise in accommodation tariffs – partly due to seasonality and partly reflecting recoil from the sharp falls over the second quarter – increased recreation & culture group prices, as did higher prices for veterinary services and swimming pool and ten pin bowling admissions charges.

Increased health insurance premiums and accountancy fees, partly offset by falls for vehicle insurance, led miscellaneous goods & services group prices higher.

Higher internet and home phone charges pushed up communications group prices. Housing group prices also rose, as higher construction costs more than offset a small fall in dwelling rents. Offsetting these moves to a degree were transport group prices, which fell courtesy of a 2% fall in domestic airfares following the introduction of lower fares on a number of routes.

“Looking through monthly volatility a rising trend is evident, with prices up 0.3% on a three-month rolling basis,” Smith said.

“Considering the quarter included sizeable July falls in vehicle licensing fees, this trend is not as benign as it could have been. Prices are still on track to deliver a sub-2% rate for annual non-tradable CPI inflation, although this looks to be a close call.

“Our Gauge suggests non-tradable inflation will print stronger than the 0.1% q/q rate the RBNZ expects when the official CPI figures are released later this week. Non-tradable inflation is not the be-all and end-all. Nonetheless, a stronger read – though still subdued – will cast further doubt on the view the RBNZ will be cutting the OCR four times in a row. We’ve never been in that camp.”