RPT-SCENARIOS-NZ central bank to signal shift to neutral stance
By Gyles Beckford
WELLINGTON, Oct 27 - New Zealand's central bank is expected to keep its policy rate steady on Thursday but will scrap the last vestige of its explicit easing bias by dropping any reference to rates going lower.
The Reserve Bank of New Zealand is laying the ground work for a move to a tightening cycle next year but this week will keep its cash rate at a record low of 2.5 percent for the fourth consecutive month, all 18 analysts in a Reuters poll said.
A string of data -- retail sales, house sales and prices, consumer and business confidence -- has shown a lift in domestic activity.
Inflation in the three months to Sept. 30 was stronger than expected and the central bank governor said last week a rally in the New Zealand dollar was not an impediment to a rate rise. [ID:nSYD485255] [ID:nSYD348934]
Following are scenarios on what the RBNZ might say and do:
SIGNALS SHIFT TO NEUTRAL STANCE:
The central bank is highly likely to drop a reference to keeping rates lower for longer to signify a shift to a neutral policy stance.
In September, it dropped a reference to rates possibly moving "modestly lower over coming quarters" but retained an easing bias by saying: "We continue to expect to keep the OCR at or below the current level through until the latter part of 2010".
That bias will be dropped or at least modified.
As a minimum, it is seen dropping the reference to "below". It might go further by making its commitment to the current rate more open ended, such as by saying "for some time yet" or saying it will look at data to assess the strength of recovery.
The RBNZ will be anxious to avoid stoking either the currency or interest rates though. So it might emphasise the surplus capacity in the economy and a need for continued monetary support as it looks to its December forecasts to reassess the state of the recovery.
Financial markets have priced in 25 basis point rate rises in both January and March <NZDOIS>, and the trade weighted NZ dollar <=NZD>, the RBNZ's preferred currency measure, is nearly 8 percent higher than the central bank's forecast in September.
In a Reuters poll, seven of 18 analysts expect a rate rise in the first quarter of 2010 and all but two see rate rises by the middle of the year. [NZ/POLL]
REPEATS LOW FOR LONGER POLICY -- THE STATUS QUO Unlikely. Such a reaffirmation is seen as not necessary nor credible given the improvement in the economy and prospects for global growth.
The central bank cut rates by 575 basis points between July 2008 and April this year to fend off the global downturn. The recession is technically over.
GDP rose 0.1 percent in the three months to June 30 after five consecutive quarters of economic contraction, New Zealand's longest recession on record.
Data this month showed unexpectedly strong price pressures. Consumer prices rose 1.3 percent in July to September quarter.
The central bank has previously said economic recovery will be "patchy" and "fragile" but the strength of recent data makes a an easing bias untenable.
A reiteration of this stance would dampen market enthusiasm on the steadily appreciating currency, and cool interest rates -- but only for a brief period.
CENTRAL BANK RAISES OR CUTS CASH RATE:
An out of left field choice, not picked by any analyst.
The stronger NZ dollar and a rise in market rates in recent months have effectively delivered tighter financial conditions already and given the central bank breathing space to assess conditions and prepare the way for the inevitable policy change.
Proponents for a further rate cut -- mainly exporters and manufacturers -- say further action is needed to bring down the NZ dollar and interest rates because they are a threat to the nascent economic recovery.
A cut in the policy rate would prompt a sell off in the currency and debt markets, but unless the central bank could make a convincing case, any falls might be shortlived.
An increase in the policy rate would add fuel to the fire under the currency and interest rates.