Roger J Kerr sees six reasons consumer demand, labour market conditions and supply-side inflation pressures should be seen by the RBNZ as more important than high house prices

 By Roger J Kerr

Is the RBNZ on a pre-set and fixed plan of front-loading OCR interest rate increases at this time, or are they prepared to be flexible and adjust the timing and extent of OCR increase as economic data and financial market movements unfold?

The outcome of this week’s CPI inflation data (released on Wednesday 16 July) may provide the answer to that question.

A lower than expected inflation result for the June quarter, below the RBNZ +0.30% forecast and below the +0.40% economist consensus forecasts, should prompt some serious RBNZ re-thinking as the starting point is lower for future inflation forecasts.

The high NZ dollar continues to push the price of consumer goods lower and both telecommunication and insurance prices are also decreasing.

A CPI outcome above+0.40% for the June quarter on Wednesday will make the 24 July OCR review a dead certainty for the fourth 0.25% lift since March.

Historical inflation numbers are interesting for testing forecast accuracy, however management of monetary policy is all about assessing future economic conditions and what they mean for inflationary pressures.

Forward looking economic lead-indicators for the RBNZ to think seriously about in terms of overall consumer demand, labour market conditions and supply-side inflation pressures over the next 12 months include:

- Business and consumer confidence measures are correcting back down from high levels as the high dollar threatens job security in the large export industries.

- The plunge in dairy and log prices is requiring GDP growth forecasts to be revised downwards, rendering “above non-inflationary growth rates” arguments as redundant. Export trade numbers are not going to be that flash over coming months as forward looking indicators like the ANZ’s truckometer are starting to show.

- Household and agriculture credit growth remains muted, thus the “wealth effect” factor from rising property/asset prices causing demand-push inflation is not as pronounced in this current cycle.

- Wholesale prices (PPI Index) will be decreasing over coming quarters as all commodity prices continue to fall.

- Electronic card spending was "surprisingly soft" in June, displaying early signs that mortgage interest rate increases and higher petrol pump prices are prompting consumer behavioural changes already.

- Wage pressures (outside the unique Christchurch situation) across the economy show no signs of being a problem for future inflation and the strong immigration flows help the labour market supply.

Prior to the 12 June RBNZ Monetary Policy Statement the local interest rate markets were pricing in a number of the less positive economic developments listed above.

The RBNZ fears about immigration, house prices and reductions in fixed rate mortgage lending rates put paid to that lower interest rate pricing by the markets.

Time will tell who is nearer the mark.

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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