The Reserve Bank of New Zealand will be holding its monetary policy meeting this week on Wednesday. The RBNZ’s overnight cash rate or OCR is expected to remain unchanged at 1.75%.
This marks an unchanged print for six consecutive monetary policy meetings. The RBNZ last lowered interest rates from 2.0% to 1.75% in November last year. Interest rates are expected to stay put as economic data suggests that further evidence of inflationary trends are required.
This week’s monetary policy meeting will be chaired by the acting governor of the RBNZ, Grant Spencer. The central bank is expected to maintain its bias as the markets expect to see interest rate hikes coming only in early 2019.
This aptly reflects the previous RBNZ statement which said that “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, and policy may need to adjust accordingly.”
The RBNZ’s meeting comes following Monday’s data that includes the inflation expectations for the quarter. Last week also saw the release of the ANZ business outlook survey. The data showed that confidence in the economy fell into the negative with the index at -10.11 for the month of October.
The businesses participating in the survey showed that confidence in the economic activity had also eased to the lowest levels since 2015. This came amid the uncertainty from the recently concluded elections as well.
The New Zealand dollar fell sharply as the new Labor party government was formed with the help of the populist NZ First party.
New Zealand labor market paints a robust picture
Last week, the quarterly labor market data showed a stronger than expected headline print. According to official data released by Statistics New Zealand, the unemployment rate was seen falling from 4.8% in the second quarter to 4.6% in the quarter ending September.
This was stronger than the forecasts that showed a decline to 4.7%. The September quarter unemployment report showed that lowest unemployment rate since 2008 during the height of the global financial crisis.
The labor force participation rate also edged higher from 70.1% to 71.1% marking a new record high. This came simultaneously as the employment rate ticked higher to 2.2% for the quarter. The big increase in September came about following a decline in June.
The spare capacity which highlights the underutilization rate held steady at 11.8% for the period. This was, however, down from 12.3% compared on a yearly basis for the same time period.
Although the data was robust, the labor cost index increased 1.9%. On an annual basis, the labor cost index was however down 1.6% compared to the June quarter of 1.7% decline. The data showed that inflation from labor costs remained subdued which eventually dampens the outlook for inflation.
RBNZ likely to lower GDP forecasts
Besides keeping interest rates steady, the RBNZ is also expected to publish its economic forecasts. The market expectations point to a downgrade in the New Zealand’s economy during this week’s release. Thus GDP, as well as housing prices, are expected to be downgraded by the RBNZ.
With the New Zealand dollar posting strong losses on the back of the election results, this is expected to give the RBNZ some breathing space, thus ensuring that rate hikes will be pushed out further.
The downgrades come amid the uncertainty in the New Zealand markets as well following the new government that is in power. The NZ First party has repeatedly made its views clear about wanting the central bank to intervene in the currency markets and its preference for a weaker exchange.
With the number uncertainties, as cited by the RBNZ’s monetary policy meeting previously the Kiwi dollar could be seen weakening further as the central bank maintains a dovish view.