By Roger J Kerr
RBNZ Governor, Graeme Wheeler has probably already approved the text of this Thursday’s Monetary Policy Statement and written his introduction and media release, however he would have been challenged as to what tone to deliver and thus what signals to give to the financial markets.
“Forward guidance” is the new buzz word in international central bank/monetary management circles, however the RBNZ has been outlining future scenarios and their reactions to events as they unfold in the future for many years now.
The RBA in Australia likes to surprise the moneymarkets with its monetary policy decision-making in some warped display of an ego-driven power play.
Here in New Zealand the RBNZ likes to confirm or subtly hint that current interest rate market pricing is in line (or not) with their forward look on growth and inflation.
In the US, the contenders to replace Federal Reserve Governor Ben Bernanke are reported as having differing approaches to forward guidance, no surprises and relationships with the financial markets.
Front runner and current Fed deputy Janet Yellen is seen in the Bernanke mould of signalling precise economic targets like the unemployment rate down to 6.5% before monetary policy can be adjusted.
On the other side, former Clinton-era Treasury Secretary, Larry Summers is viewed as being more “Greenspanesque” in approach and thus making decisions as economic events unfold rather than always mapping the future with multiple scenarios.
Larry Summers might be your preference in a crisis, whereas Ms Yellen is the better manager in a business as usual situation in the economy.
Governor Wheeler may desire a strategy for Thursday’s statement of not talking the NZ economy up too much as he needs the exchange rate to generally be lower when he is ultimately forced to increase the OCR in March 2014.
He does not want to been seen as responsible for pushing the currency higher now just as exporters are enjoying lower levels for hedging.
His problem is that all the latest economic data on the economy confirms a much stronger growth trajectory than envisaged by the RBNZ for this time. In their June statement the RBNZ forecast quarterly GDP increases from June 2013 to June 2014 of +0.4%, +0.6%, +0.9% and +1.0%.
Across the economy there are many indicators that suggest the September quarter will be nearer +1.0% with the June quarter still negatively impacted by the drought (dairy herds dried off early).
The latest ANZ quarterly Regional Growth survey certainly points to 1.0% quarterly expansion results for the economy.
Also, consider recent retail sales, construction, property market and dairy industry statistics and prices as all being very positive as well.
The economy has a positive momentum that cannot be ignored.
I have been accused in the past by some mainstream economists of being a habitual “Pollyanna” on the economy (biased to the positive or always overly optimistic).
Economic evidence over the past 12 months and looking forward to the next 12 months would see that optimism as fully justified and accurate to boot.
What this means is that stronger economic activity in 2013 produces higher inflation 12 to 18 months time i.e. towards the end of 2014. The RBNZ must be forced to increase both their GDP growth and inflation forecasts come Thursday.
Their current forecast of annual inflation of 1.5% in June 2014 looks disturbingly low when growth, oil price, construction cost and food price pressures are taken into account.
On top of that the RBNZ have assumed a currency Trade Weighted Index (TWI) of 77.5 for June and September 2013 and thus imported consumer good prices will not be as stable as they expect with the TWI 75.35 today.
Retailers are today not discounting prices with the benefit of currency gains in their pockets, as they were for most of the last two years when the NZD/USD rate was well above 0.8000.
The RBNZ need to revise their economic forecasts higher, however they will be worried about the market’s reaction to a more upbeat prognosis.
The interest rate markets will likely see Thursday’s monetary policy statement as the RBNZ merely catching up to recent market pricing.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com