RBNZ Review - January: Less Uncertainty, Higher Possibility To Hike Rate By 2Q10

As expected, the RBNZ left the OCR unchanged at 2.5%. The accompanying statement was a short one as much uncertainty about recovery was removed. Also, the central bank reiterated December' stance that removal of policy stimulus will start around the middle of 2010 if the economy continues to recover.

The RBNZ stated that New Zealand economy continues to recover and the outlook remained 'consistent with the projections' underlying the December MPS. However, concerns about household spending, business spending and credit growth are still valid. Global activities also continue to recover but sustained growth throughout the country's trading partners, with exceptions for Australia and China, is not assured as many of them are 'still facing impaired financial sectors and overall activity still reliant on policy support'.

We find that the RBNZ omitted some concerns raised in December. As stated in the December MPS, 'A key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending'. The central bank did not mention this in January, suggesting its concerns were alleviated given recent encouraging readings in retail sales and private consumption spending.

Moreover, the central bank stated in the MPS that 'recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action'. However, this worry also disappeared at the January meeting.

Current market priced in 80% chance of a 25 bps rate hike by April. While the possibility is there, everything depends on economic indicators, especially 4Q09 GDP, housing, consumer spending data as well as the 1Q10 CPI report to be released in mid-April.

The RBNZ Governor Alan Bollard will be giving his annual address titled 'The Crisis and Monetary Policy: What we learned and where we are going' tomorrow. We expect more highlights on economic and monetary policy outlook from there