Tuesday, 17 October 2017

Will the RBNZ hold off till late '19?

The inflation numbers we got this morning - headline annual rate 1.9%, with tradables inflation running at 1.0% and non-tradables at 2.6% - were a tad higher than expected.

The numbers are always hard to interpret. On the tradables side we get inflation dealt to us by developments in the rest of the world and  movements in the exchange rate, neither of which we can do much about. On the non-tradables side - the domestically generated inflation which is all the RBNZ can influence over the longer haul - the numbers are distorted by what's going on in the housing markets, which are currently running hot.

But at least we can strip out the housing element in various ways and see what's happening ex housing. Here's the picture (I've adjusted the data mechanically to take out the GST-related blip in 2010-11). The data starting points are driven by when they start on Stats' Infoshare database.


It doesn't really matter which ex-housing measure of domestic inflation you look at: they've all risen to a little over 2%.

So the question I'm left asking is: will the RBNZ really leave monetary policy unchanged till late 2019, as is currently its stated intention? Domestic inflation (ex housing) is already at the mid-point of the Bank's target, and tradables inflation could also easily be running at 2.0% or more: the IMF's latest World Economic Outlook has inflation in the developed world at 1.7% next year and inflation in emerging/developing economies at 4.4%. If you weight those up to get a world inflation rate, it comes out around 3.3%. Call it  3%: then if the NZ$ stays where it is, and domestic inflation (even after taking out the hot housing bits) stays at say 2.25%, then you get overall inflation running at around 2.5%.

That doesn't sound to me like a great case for leaving monetary policy on an accommodative setting all the way out to late 2019. The financial futures market doesn't think so either: 90 day bank bill futures, for example, are pricing in a 0.25% increase by the end of next year, a full year before the RBNZ says it will increase rates. Some folks think it could be earlier again: the BNZ's latest forecasts, earlier this month, see the RBNZ hiking the official cash by 0.25% in the September 2018 quarter.

Any sane central bank won't react to one quarter's numbers, and everyone - central bankers and private sector forecasters, and that includes me being as wrong as anyone else - have all been repeatedly blindsided by inflation not appearing like it was supposed to. But on the latest data I think I'd be sketching in the prospect of higher interest rates a good deal earlier than the Bank has been signalling.

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