RBNZ: Firmly on hold, but the inflation forecasts are set to rise – HSBC

The analysis team at HSBC suggests that higher-than-expected Q1 CPI inflation and a lower NZD should see the RBNZ lift its inflation forecasts but they expect the central bank to remain firmly on hold and take a cautious approach with its policy rate outlook.

Key Quotes

“Since the last RBNZ rate decision the key local economic development has been the stronger-than-expected Q1 CPI print. Headline inflation exceeded 2% for the first time in over five years and a number of the key underlying inflation measures also lifted closer to 2%. This is positive news for the central bank. However, given the long period of low inflation, we expect the RBNZ to, nonetheless, remain on hold for now.”

“Of more interest will be how the RBNZ adjusts its forecasts. It is clear that the  near-term inflation forecasts will have to be revised noticeably higher, given the 0.7ppt upside surprise to Q1 CPI. In addition, the NZD has fallen below the RBNZ’s forecasts for the first time in quite some time, which will boost the forecasts for tradable inflation. However, do these changes necessarily result in a materially stronger medium-term inflation outlook? We doubt it. We expect the RBNZ to be cautious, given that underlying inflation remains below 2% and wages growth is weak.”

“Aside from inflation and the NZD, not much has changed since the last set of RBNZ forecasts were published. Growth remains strong, dairy prices have held up well, and strong net migration inflows have continued. The latest round of macro-prudential tightening has slowed lending to investors, although it is still too early to draw firm conclusions about the medium-term impact on house prices.”

“Following a long period of low inflation, and to avoid upward pressure on the NZD, we expect the RBNZ will retain a cautious outlook, reiterating that ‘monetary policy will remain accommodative for a considerable period’. However, given the higher starting point for inflation, the projected start of the next tightening phase in the RBNZ’s policy rate forecasts is expected to be brought forward from the late 2019 timeframe indicated in February. The extent of profile adjustment will be a key market focus. We retain our view that the RBNZ will lift its cash rate from Q1 2018.”

“Amid rate stability, HSBC’s onshore AU/NZ Rates/FX strategist, Tom Nash, suggests receivers look to front-end NZD rates where roll-down is the highest in the G10.  For FX, a subtle policy shift could push AUD-NZD to test a key support at 1.064.”