Signs of growing momentum in the New Zealand economy might force the Reserve Bank into hiking interest rates earlier than it has planned, according to BNZ economists.
The Official Cash Rate set by the RBNZ has been at an all-time low of 2.5% since March 2011. The RBNZ itself forecast in its last full Monetary Policy Statement (MPS) on December 6 it expected the 90 day bill rate (a proxy for the OCR) to start rising from the March quarter of 2014 and rise around half a percentage point by early 2015.
But a string of data has suggested the economy may be picking up faster than the central bank has forecast. The RBNZ has forecast GDP growth of 0.4% for the December 2012 quarter, but this projection is now looking low.
The house market is heating up, while just this week we have seen the ANZ-Roy Morgan NZ Consumer Confidence Survey hitting a 32-month high, BNZ - BusinessNZ's Performance of Manufacturing Index rise strongly and retail sales showing their biggest quarterly volume increase in six years. On top of this the Kiwi dollar has been hitting post-float highs against a basket of currencies of our trading partners - with the retail sales statistics helping to fuel this.
BNZ economist Doug Steel said the retail results added yet more support to a decent fourth-quarter GDP figure.
"We expected a big lift in retail today and even got a bit more. Not enough surprise to have us lifting our 0.7% pick for Q4 GDP at this point. But looking through the expenditure side of the national accounts the pressure is building to raise our Q4 GDP estimate.
"Either way, the latest string of data, including today’s retail figures, suggest that the economy is running a bit faster that the RBNZ had anticipated. Recall the Bank had +0.4% factored in for Q4 GDP.
"This is not enough to have the bank moving rates in the near term, but the economic momentum we’re seeing might well be enough to have it moving the projected timing of the first hike back into 2013 from the early 2014 it published in the December Monetary Policy Statement."
Steel said BNZ economists were still picking December 2013 for the first OCR hike. "However, the risks around this view have been steadily shifting from later than that to earlier over the past couple of months."
Westpac senior economist Michael Gordon said financial markets seemed to have belatedly cottoned on to the relatively positive growth of the New Zealand economy. He noted that the two-year swap rate had risen to 3.05%, its highest since March last year.
"Our forecast of 3% [economic] growth this year is hardly spectacular but it compares well with the likes of the US, Europe, and even Australia, which is nearing the peak of its (mining-related) investment boom just as New Zealand’s own (quake-related) investment boom is gearing up," he said.
The retail figure was "broadly in line" with Westpac's forecast of 0.8% growth in Q4 GDP.
"While we haven’t done a detailed breakdown yet, our sense is that strength in consumer spending and construction will be partly offset by a drop in agriculture, as growing conditions have gone from fantastic to just average overall (and pretty poor in some parts of the North Island).
"While growth is shaping up stronger than the Reserve Bank’s forecasts, one of the reasons for that strength is that inflation remains low (although rising food and fuel prices are reducing the odds of a third straight reading of sub-1% inflation).
"Our view remains that the tension between low consumer price inflation and accelerating house prices and credit growth will stay the RBNZ’s hand on interest rates until the end of this year – but from then on, the OCR could rise much further than the market is anticipating."