The stronger than expected labour market figures for the fourth quarter released on Wednesday have made it a done deal that the Reserve Bank will leave the Official Cash Rate unchanged at next week's review.
Indeed, so relatively robust is the appearance of the New Zealand economy that in a normal environment some thoughts might now be turning potentially to the next OCR movement even being up. However...there's a very big however.
As BNZ's head of research Stephen Toplis put it in his review of the labour market data: "The labour data provide the RBNZ with no excuse to even contemplate lowering interest rates. To the contrary, in and of itself, these figures suggest the RBNZ should be seriously considering raising rates."
But then he goes on: "Of course, the data are historical. And the big question on everyone’s lips is what will the coronavirus do to growth, employment and inflation? Given the extent of this risk, and the uncertainties that surround it, any talk of tighter policy is premature. But, be this as it may, the starting point remains important and there is clear indication in [Wednesday's labour market] figures that the economy does have the ability to absorb some of the current shock without its overall stance becoming unhealthy."
So, yes, the coronavirus outbreak is reminding us once again, if we needed it, that New Zealand's economy is a tiny rowboat in a vast churning sea. The extent to which the impact of the virus and the measures to control it damage the New Zealand economy is the big multi-billion dollar question, but the RBNZ will for sure be watching developments through a magnifying glass and be ready to jump in in future months with another interest rate cut.
In a preview of next Wednesday's (February 12) OCR review, ANZ chief economist Sharon Zollner says she expects the RBNZ will indicate that they expect to sit on the side-lines for the time being, but that they are watching emerging global risks closely.
"They will acknowledge the human impact of the tragic new coronavirus, with cautious language about possible risks to the economic outlook. Domestic conditions give the RBNZ scope to wait and see how developments unfold.
"We expect the OCR track will be broadly unchanged, despite a stronger domestic backdrop. The economic impacts associated with the outbreak are highly uncertain and are likely to sit largely in the ‘risks’ basket for now. But a short-term negative impact on GDP growth, commodity prices and global wholesale interest rates may feature in the central forecast. Exactly how they incorporate it won’t matter too much – any forecast will be out of date in a week."
Westpac's chief economist Dominick Stephens and Westpac industry economist Paul Clark say they expect the impact of the coronavirus outbreak could knock 0.6 percentage points off New Zealand's March quarter GDP. They are now therefore predicting just 0.1% GDP growth for that quarter. They do, however, currently expect that tourism and other export activity will start recovering through the middle of 2020 and that as the level of GDP returns to normal levels, quarterly growth rates will be higher than normal.
"Consequently, we are now forecasting quite rapid rates of GDP growth in the late part of 2020," they say. Assuming that's what occurs they say there would be little lasting damage to the NZ economy.
The swirling global backdrop and threat to our economy come at a time in which New Zealand's domestic interest rates have been trending up.
In the wake of the labour market figures the wholesale swap rates rallied strongly on Wednesday, with two-year swap rates rising by 7 basis points to 1.12%
According to interest.co.nz calculations, the average rate on fixed mortgage rates has been rising. For example the two-year fixed rate after hitting a low of 3.46% in November has now climbed back up to 3.55%. And this will likely increase as other banks move to match the ANZ's increase this week.
The move to gradually higher interest rates has come as the housing market has sprung back to life again.
ANZ's Zollner points out that house price inflation has been stronger than expected.
"We expect house price inflation will peak at 8% y/y versus an RBNZ forecast peak of 5.7%. This will support both consumption and residential investment."
She says domestic developments in the New Zealand economy would point to an upgrade to the RBNZ’s growth forecasts. But this is likely to be tempered somewhat by a near-term dent in exports from the coronavirus impact and a more conservative outlook for commodity prices.
"It is far too soon to gauge the impact, however, and it is unknown how much the RBNZ will build into their central forecasts. We expect that the OCR track will be broadly unchanged, but that the RBNZ will signal a willingness to provide more stimulus if required."