Growth hit, inflation lift
We were pleasantly surprised by the strength in last Friday’s Performance of Manufacturing Index (PMI) for March. Alas, the same cannot be said for this morning’s Performance of Services Index (PSI). The combined activity index shows growth is under downward pressure. Friday’s Selected Prices data for March will be dominated by massive increases in fuel prices. All the indicators will be assessed for compatibility with our 0.8% q/q and 3.0% y/y pick for Q1 CPI and help to set the base for our 4.5% y/y forecast for Q2.
RBNZ enters the fray
The fog of war remains thick in the Middle East, making for a very challenging backdrop for policy makers. The RBNZ’s April Monetary Policy Review is scheduled for 2pm tomorrow. We expected the Bank to hold the Official Cash Rate at 2.25%.
April Monetary Policy (P)Review
On April 8 the Reserve Bank of New Zealand will formally deliver its latest views on monetary policy. With the current turmoil one might have thought there would be great anticipation about the release of this update. But, in this case, we think the Bank has already released its views when Governor Breman delivered her speech Global shockwaves to Kiwi shores: The impact of the Iran conflict on New Zealand.
Breman’s war stories
Beyond the news flow from the Middle East, local market attention will be on tomorrow’s speech by RBNZ Governor Breman to Business NZ’s CEO Forum in Auckland. There was always going to be significant interest in what the Governor has to say given recent events. A late change in topic has sharpened focus.
An historical stock take
It’s a huge week ahead for New Zealand data. By the end of the week we will have a fairly comprehensive summary of the state of the New Zealand economy including its growth, external accounts and inflation. Sure the data are very old news but it would be wrong to completely dismiss them because they will provide great insight into the starting point for the economy as we try to come to grips with the impact of the war in the Middle East.
Inflation up, growth down
The New Zealand economy is amid a fragile recovery. A war in the Middle East and an oil shock are the last thing it needs. But those are the cards that have been dealt. So, all bets are now off. We’ll have to revise up our inflation forecasts and down our growth forecasts. So will the central bank but what is much less clear is what it all means for monetary policy.
Terms of trade to the rescue
Middle Eastern chaos will dominate the news front in the week ahead. It will put upward pressure on inflation and downward pressure on growth. How much and for how long is anyone’s guess. Meanwhile, back in NZ, we learnt today that the trend recovery in the labour market continues, albeit at a slow pace. Later in the week we’ll get greater insight into the state of the construction sector, a fiscal update and more news on the state of the external sector.
Rapid recovery for retail
We were looking for today’s Q4 retail trade data to show a modest gain and add evidence of the economic recovery. The 0.9% q/q lift in retail sales volumes did this and more. On the back of the strength in today’s data, we have nudged up our Q4 GDP pick one tenth to 0.6% q/q. Business and consumer confidence surveys are due later this week.
RBNZ Seen On Hold This Week
The RBNZ is expected to hold the cash rate at 2.25% at Wednesday’s MPS. Assuming the unanimously expected outcome occurs, focus will quickly turn to the Bank’s language and forward projections. We expect the possibility of easing to be removed from the Bank’s published interest rate track, such that the low remains at 2.25% through to the December quarter. From there on in we would expect the track to be around 10 basis points higher than previously published. Growth indicators have been generally positive, including the PMI and PSI, although today’s transactions data disappointed. Inflation expectations have nudged higher. Tomorrow’s Selected Prices will give some guidance to Q1 CPI.
RBNZ Monetary Policy Preview
We believe the RBNZ will have to raise its cash rate in September of this year but, given the uncertainties that prevail, we do not expect it to express that intent when it releases its February 18 Monetary Policy Statement. We expect the possibility of an easing to be removed from the Bank’s published interest rate track such that the low remains at 2.25% through to the December quarter. From there on in we would expect the track to be around 10 basis points higher than previously published. Higher than expected growth and inflation are likely to be acknowledged but there is likely to be some push back on current market pricing.
Labour Market Preview: Too Soon?
Wednesday’s Q4 labour market data is forecast to show the first quarterly employment growth in 18 months and a halting in the drift higher in the unemployment rate. Annual wage disinflation is seen nearing an end, as improving labour demand meets some difficulty in being satisfied. Commodity price updates and December building consents data are also due.
Forging ahead
Our view of the world can be summed up in three sentences:
• Growth is picking up toward potential
• This will eventually result in an improvement in labour market conditions
• Which, in turn, will see upward pressure on inflation and the cash rate move back toward neutral with reasonable haste once the need is confirmed.
Optimism to kick off the New Year
Resumed data flow over the last week suggests that New Zealand ended 2025 on a more optimistic note. Combining the messages of the QSBO, PMI and PSI reports, we see upside risk to our near-term growth projections. For the week ahead, the main data focus will be Friday’s Q4 CPI. Headline inflation is expected to print at 0.4% q/q and 2.9% y/y, a couple of ticks higher than the RBNZ’s November MPS forecast.