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Roger J Kerr advises the RBNZ to select their words much more carefully this time than they did in March as the currency needs to follow dairy prices down

Roger J Kerr advises the RBNZ to select their words much more carefully this time than they did in March as the currency needs to follow dairy prices down

 By Roger J Kerr

Whether the RBNZ choses to deliver some subtle new messages about recent changes in NZ economic conditions with this Thursday’s OCR increase to 3% or whether they “stay on message” with their pre-set March MPS plan will tell us something about how close they are to the real economy.

There have been two major developments in recent weeks directly affecting the economic and inflation outlook which really need to be assessed and commented on by the RBNZ.

They are not game-changers at this stage, however a “wait and see” approach to these changes may not be the best monetary policy management response either.

There is a question in my mind that if they knew in early March what we know now about lower actual inflation for the year to 31 March and international dairy prices falling 22%, would they have projected OCR increases earlier and higher than what the market was pricing at the time.

Probably not, and they could have prevented the markets sending the Kiwi dollar a few cents higher.

Therefore, the tone and inferences of the accompanying statement from Governor Graeme Wheeler this Thursday takes on special significance for the markets.

In my opinion, the Governor has to state that the recent divergence of the NZ dollar from tumbling Wholemilk Powder (WMP) prices, if continued for much longer, will cause the RBNZ to revise downwards their GDP growth forecasts for 2014 and 2015.

A lower growth trajectory coupled with actual inflation starting at a lower base point, due to the March quarter’s CPI increase being substantially below forecast, means that their 2014/2015 inflation forecasts have to be adjusted downwards.

A failure by the RBNZ to recognise and comment on these two very recent developments on Thursday would indicate an intransigence of sticking with a pre-programed game-plan rather than adjusting to conditions and playing what is in front of you. You lose rugby matches if you cannot adjust your approach/strategy as the game unfolds.

It is likely that global FX markets will over coming weeks belatedly recognise that New Zealand’s major export commodity is undergoing a major correction down and mark the Kiwi dollar lower.

If that does not happen and the currency/WMP price divergence continues the RBNZ may be forced to cancel the planned June/July OCR increase.

The exchange rate plays a dominant role in the NZ economy (inflation and GDP growth) and the RBNZ need to convey this message to all and sundry.

Likewise, mortgage interest rates are directly linked to consumer spending behaviour and it is interesting to observe that several economic commentators are now also commenting that interest rate increases this year will dent retail spending over the second half of the year. 

The RBNZ have an opportunity this Thursday to jawbone the Kiwi dollar lower by selecting their words more carefully than their somewhat injudicious comments after the 13 March Monetary Policy Statement that drove the Kiwi dollar higher. 

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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

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4 Comments

Hurray. $ up , Interest rates up. everyoneis happy, including me. One day rjk u will be right. after all it's always a 50/50 poposition and your time must surely be coming after so, so many wrong calls.

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whole milk powder? do they have half milk powder?

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I have to agree with you Roger......and todays OCR rise today is indicating they RBNZ is on a pre-programmed plan.

 

The RBNZ is looking like they are deliberating hurting exporters.

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Thankfully they dont follow soothsayers

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