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Our Blog

RBNZ: To cut or not to cut

07 December 2015
interest rate, labour market, MPS, RBNZ
The RBNZ releases its December Monetary Policy Statement (MPS) this Thursday with the big question being whether there is another interest rate cut in the bag.  Our view is that having signalled another cut at the last MPS, there is no compelling reason not to deliver.
 
Sure some of the growth indicators are looking better.  In particular both business and consumer confidence appear to be on the mend after a mid-year slump on over-inflated concern and hyperbole around the imminent demise of the Chinese economy.  At the same time dairy prices have waxed and waned but appear to be trying to form a base at a level that suggest the RBNZ will be able to revise up its forecast for the terms of trade.  And net migration inflows continue to hit new record highs.
 
But it’s the labour market that I think should still see the RBNZ deliver on an interest rate cut this week.  Our views on monetary policy have evolved with the labour market.  As I’ve said many time before the big surprise for me this cycle has been the extent to which increased labour supply via net migration and a high participation rate have conspired to keep wage increases and therefore domestic inflationary pressures in check.   Non-tradeables inflation was 1.5% in the year to September, a 14-year low.  At the same time unit labour costs (as measured by the private sector Labour Cost Index) are again ticking lower.

Inflation and the Labour Cost Index
Annual % change
 

Source:  Statistics New Zealand

Headline inflation will rise over the next few quarters as big declines in fuel prices drop out of the annual calculation and as (at least some of) the recent decline in the exchange rate feeds through into retail prices.  But importantly, while some of the growth indicators are looking better, we still expect the unemployment rate to rise over the next few quarters.  Outside some notable sectors (e.g. construction in Auckland) we expect this to keep wages and underlying inflationary pressures in check.
 
So in short – we see no compelling reason for the RBNZ to back away from or even delay its already flagged interest rate cut this week.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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