Thursday, 10 September 2015

Nothing to see here, folks, move along

No surprises in today's Monetary Policy Statement - and that's fine: it's best if central banks don't have to make abrupt moves, and it's also a good thing when market expectations, and what the RBNZ actually delivers, are lined up. One 0.25% cut today, and another one likely by the end of the year, is what everyone expected,  and that's what they got. All good.

Sometimes the most interesting things are in the details of the text (pdf), but again there's not a lot to pick over this time. You may have seen some folks talking about potential recession ahead: that's not the RBNZ's view. Here's their forecast for GDP growth: the low point for growth is around now, with things picking up next year.


If I had to pick on anything, it's on the inflation outlook, and especially the outlook for the inflation that we generate here in New Zealand ('non tradables inflation'). Here's the Bank's best guess at what's going to happen.


You'll see that non-tradables inflation is expected to drop a bit more (in June it was 2.1%), and then pick up again. But inflation everywhere in the western world has turned out lower than central banks had expected: will it actually pick up again like the Bank thinks?

The reason I ask, is that domestic non-tradables inflation tends to be associated with the economy running flat tack - or in the jargon, at or above its 'potential output' level. But on the Bank's own projections (shown below), the economy isn't likely to be going flat tack (the forecast blue line in the graph never heads well above 0).


So there's still a risk that inflation, which has been somewhat stubbornly below the middle of the Bank's target 1%-3% range (and indeed, currently below the 1% end, never mind the midpoint), will stay that way. But that said, this was otherwise very much an 'as expected' announcement.

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