RBNZ to Hold Monetary Policy Unchanged. Focus on the Quarterly MPS

The RBNZ will likely leave the OCR at 2.5%, for the 11th month, at the March meeting. Therefore, the market will focus on the Monetary Policy Statement as well as how the central bank describe economic outlook. On the whole, we expect the RBNZ will deliver a neutral tone, if not slightly more dovish than January's, on the outlook as economic data released in recent weeks were rather mixed. The post- meeting statement should retain the reference that 'we would expect to begin removing policy stimulus around the middle of 2010'.

Economic growth has been accelerating both domestically and overseas. GDP expansion in the US, Australia and China beat market expectations in 4Q09. For New Zealand, although growth in the third quarter was disappointing (+0.2% vs RBNZ's forecast of +0.4%), activities should have caught up with the market anticipating a +0.8% growth in the fourth quarter. Consumer and business confidence are strong that signal improvement in GDP.

Headline CPI fell -0.2% m/m in 4Q09 as strong New Zealand dollar dampened tradable inflation while sluggish domestic demand resulted in benign non-tradable inflation. However, on annual basis, inflation rose +2%, following a +1.7% increase in 3Q09.

It is possible for the RBNZ to revise up its inflation forecasts, given that the 'weak' CPI reading was still above the central bank's estimates. Moreover, the Government's Budget (due on May 20) may push CPI higher.

While it's not confirmed, the New Zealand Government may announce to increase the GST to 15% in 3Q10 and cancel depreciation allowances on property investments. These policies, together with the introduction of the Emissions Trading Scheme (effective July 1), may speed up spending and house activities in the near-term.

Employment outlook, nevertheless, remains weak. Unemployment rate surged to a decade-high at 7.3% in 4Q09 as contraction in payrolls compounded with higher participation rate. The number of full-time jobs declined, by -0.3% q/q while part-time jobs increased by a mere +0.1% q/q. Average working hours reduced -0.4% during the quarter.

Housing market activities seem to be losing steam despite resilient property prices. REINZ's data showed that house sales have dropped for 4 months and reached a record low of 3666 units in January 2010.

In December's MPS, the RBNZ said 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'. Since then, financial conditions have eased with bond yields easing and the kiwi weakening. We expect the central bank will not address much about these issues at the latest MPS.