The RBNZ meets this week for its quarterly monetary policy meeting and will announce its rate decision at 21:00 GMT on Wednesday July 25th. Most analysts expect the RBNZ to remain stationary keeping rates at 2.5%. The policy statement at the last meeting noted that,â€ Inflation expectations moderated in the March quarter following the publication of December 2011 annual CPI inflation, which was the first unaffected by the 2010 increase in GST. These factors suggest a limited degree of inflationary pressure in the economy at present.â€
One of the key factors that has eased price pressures further since the last report is the marked decline in energy prices. With crude costs easing from more tha $110/bbl WTI to as lows as $80/bbl WTI inflation gauges in New Zealand have continued to decline. New Zealand CPI hits its lowest level in 13 years rising only 1.0% in the April-June measuring period.
However as the year moves to a close, price pressures in the New Zealand economy may increase as reconstruction efforts in earthquake devastated Christchurch begin in earnest. Furthermore, the recent drought in the US has spiked the prices of soft commodities of which New Zealand remains a key exporter. The RBNZ therefore, may make note of the possible inflation risks to the countryâ€™s economy should commodity prices continue to rise. Nevertheless, we think its highly unlikely that the central bank will tighten policy at all this year, given the turbulence in the European capital markets and the clear slowdown in global economic growth.
Furthermore, with kiwi remaining at elevated levels near the .8000 mark, the RBNZ is keenly aware of the currencyâ€™s impact on the economyâ€™s vital export sector. At the last policy meeting, the RBNZ specifically noted that, â€œthe high value of the New Zealand dollar is detrimental to the tradable sector, undermines GDP growth and inhibits rebalancing in the New Zealand economy. Sustained strength in the New Zealand dollar would reduce the need for future increases in the OCR.â€ Given that sentiment we believe that the RBNZ will maintain it neutral bias at this weekâ€™s meeting.