KiwiBank: RBNZ November 2017 Monetary Policy Statement – A little bit closer: FXWW

From the FXWW Chatroom: Key Points
The RBNZ left the OCR on hold this morning at 1.75% as widely expected. However, the Bank moved forward its forecast timing for OCR increases by one quarter – from Q3 2019 to Q2 2019 – and had a slightly higher end point for its OCR track of 2.3%. While not a significant change, it does reflect the more positive shift in data that we have seen in recent months. We maintain our view that OCR hikes will start from November 2018, albeit still at a gradual pace.
The Bank has incorporated four areas of the new government’s policies into its forecasts, including “increased government spending; the Government’s housing programme; changes to requirements for work and study visas; and increases to the minimum wage”. The RBNZ noted that there remains considerable uncertainty around the outlook for these policies and the path of implementation.
In line with our view, the Bank noted that there is a risk that public investment in residential building could cannibalise private sector investment – so the net effect in terms of boosting the supply of residential dwellings is likely to more muted than that implied by the government. On migration, the Bank is assuming a faster decline in net migration compared with its August MPS forecasts – although the exact extent of this is unclear. We expect net migration to come back from current high levels, but still remain at around 40,000 over the next few years.
The Bank’s growth forecasts are a bit softer in the near-term but have a higher end point at 2.7% in September 2020 – compared with 2.1% yoy forecast previously. The RBNZ noted that the expected boost to fiscal spending has added an extra 0.5%pts to its GDP track compared with the August MPS forecasts. The Bank has also significantly revised up its inflation forecasts and now has inflation only falling back to 1.5% yoy in March 2018 – compared with a dip to 0.7% yoy in its August MPS. This gets inflation back to 2.1% yoy by June 2018 – compared with its previous forecasts of only getting inflation back to 2% yoy in early 2019. But while headline inflation is expected to be stronger, the RBNZ remains cautious about the extent of core inflation we are seeing in the NZ economy.
On the housing market, the RBNZ noted the softening we have seen in the construction sector and has revised down its forecasts for residential investment growth in coming years – although has a more drawn-out investment profile over the forecast horizon. With strong demand for housing remaining, it looks like supply will now take longer to come on board given various constraints (access to credit, labour and materials).
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