Sept 20, 2016 - New Zealand and the next challenge for its Central bank

We are heading towards the super Wednesday which will be the rate decision day for BoJ, Fed and RBNZ. About the first two there were lots of analyses and opinions but RBNZ didn`t get that much of a spot light due to lower global impact. The story is however quite interesting…

The Success story

The Kiwi had a great year so far when following the failure of a double top formation in January the NZDUSD rallied more than 15%... this would be a nice gain even for a blue chip. The economy is in great conditions with above average growth rate at 3.6%, employment close to maximums with full time employment skyrocketing while part time employment also growing steadily. The government budget was in surplus equalling 0.2% of the GDP in the fiscal year 2014/2015.

The problems

The housing market is struggling with insufficient stocks of available houses and house prices are rising 6% p.a. based on seasonally adjusted data of REINZ. The Real Estate Institute of New Zealand (REINZ) spokesperson Bryan Thomson said recently, “The underlying trends indicate that the struggle for stock is the single biggest factor driving market behaviour and price expectations across the country, as we await Spring listings“. Simply the economy seems to be too strong to cut the rate. But then why did the RBNZ the cut the benchmark rate in August.

The problems to solve are the inflation which is stubbornly low and the deficit of the Current account which is more than 3% of GDP but well compensated by capital inflows. The Core CPI is below 2% since late 2011 however since 2015 it’s in a rising trend. Actually this rising trend of inflation is the main reason some analyst are saying there is no need for further rate cut even RBNZ said they will continue with the easing. The other reason is the competitiveness of the economy due to strong NZD. One of the key areas are dairy products which are one of the key export products of the country.  With a strong currency one of the key industries of the country can get into big trouble which may have long term negative consequences on the country.

Conclusion

However the economy seems to be simply too strong to cut the rates at this point without risking an overshooting of inflation targets and further inflating the housing bubble. There are other tools from fiscal policy to support key industries which could be used. However in the current sick policy environment on global level the politicians are reluctant to act as necessary.

We strongly believe there will be no cut this time but due to the strong dairy lobby we will see further cut later this year or at the beginning of next year. For comparison please find below some macro data by country. The red highlight means long term unsustainable, the yellow means OK short/medium term and the green means long term positive.

Don´t forget to watch you risk and be consistent

Mr. TechMan

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