Chief economist update: New RBNZ Governor maintains old policy

The prevailing global dynamics of tight labour markets and low inflation is not the sole purview of big developed economies.

It's happening in the US - the biggest economy in the world (US$18.6 trillion in 2016, according to World Bank estimates) - and it's happening in New Zealand - the 53rd in the world with 2016 GDP estimated at US$185 billion - which is roughly 1/100th the size of the US.

The Reserve Bank of New Zealand's policy meeting of 10 May 2018 might be Governor Adrian Orr's first - he assumed office on March 27 (five days after the central bank's 22 March meet) - but New Zealand's monetary policy settings remained unchanged since the last 25 basis point reduction in the official cash rate from 2% to 1.75% way back in November 2016.

As Governor Orr explained in his statement, this is because while "Economic growth and employment in New Zealand remain robust, near their sustainable levels ... consumer price inflation remains below the 2% mid-point of our target due, in part, to recent low food and import price inflation, and subdued wage pressures."

Certainly, New Zealand's labour market is "robust". The unemployment rate continued to fell for the fifth straight quarter to 4.4% in the March 2018 quarter - the lowest level since December 2008 - from 4.5% in the previous three-month period.

But I wonder whether this is lagged impact from the strong GDP growth of quarters gone by. After peaking at a five-quarter high of 4% in the December 2016 quarter, annual economic growth had been decelerating - down to 2.9% in the year to the December 2017 quarter - the slowest since the third quarter of 2014.

So far consumer spending seems to be holding up - retail sales up by 5.4% in the year to the December 2017 quarter from 4.6% in the previous quarter, but with wages growth stalling (1.8% year-on-year over the past three quarters to March) and business confidence remaining in the negative over the past seven months and falling (down to a reading of minus 23.4% in April from minus 20% in March), a deterioration in the country's labour market is likely and with it, continued sluggish growth in wages that would foster weaker consumer spending.

This doesn't bode well for Governor Orr's optimism that, "emerging capacity constraints are projected to see New Zealand's consumer price inflation gradually rise to our 2% annual target."

New Zealand's CPI inflation slowed to an annual rate of 1.1% in the March 2018 quarter - the second quarter of easing prices and the slowest since the September 2016 quarter.

Therefore, the fresh governor of the RBNZ's forward guidance is hardly surprising.

"The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come."

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: USOfficial Cash RateCPIGovernor Adrian OrrNew RBNZ GovernorReserve Bank of New ZealandUnited StatesWorld Bank
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