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Moderate GDP growth unlikely to worry RBNZ, economists say

Thursday 21st March 2019

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New Zealand’s economy grew less than the central bank expected in the fourth quarter but economists don't expect the data to spur any change in the Reserve Bank's message at next week's policy review.

Gross domestic product expanded 0.6 percent in the three months to Dec. 31 versus a 0.3 percent rise in the September quarter and was 2.3 percent higher than the same quarter a year earlier, Stats NZ said. Economists had expected GDP to expand 0.6 percent on the quarter and 2.5 percent on the year, according to the median in a Bloomberg poll. The central bank had tipped an expansion of 0.8 percent.

Economists are still widely expecting the central bank will keep the official cash rate on hold at a record low 1.75 percent at next week's monetary policy review and will reiterate that the next move could be up or down, depending on how the data unfolds. 

"While we expect the RBNZ in next week’s OCR review to acknowledge that the economy has lost a bit of steam, we don’t see today’s print as sufficient fodder to pull the bank out of their data-dependent neutral mode – yet," ANZ Bank economist Miles Workman said.

Over time, however,  ANZ expects capacity pressures to wane, with inflationary pressures lacking the strength required to maintain core inflation near the RBNZ’s target midpoint.  The central bank is mandated to keep inflation between 1 percent and 3 percent with a focus on the mid-point. 

"Accordingly, we expect the next move in the OCR will be a cut and have pencilled the first in for November, with two follow up cuts taking it to 1 percent by late 2020," Workman says. 

ASB Bank senior economist Jane Turner notes that the annual growth was weaker than expected due to downward revisions to the first half of the year. Should the GDP picture start to "look a little ugly", the bank will get increasingly wary about its view that growth will recover during 2019.

ASB still expects the RBNZ to leave the cash rate on hold over 2019 and 2020 and says the next likely move is a hike in 2021. 

"With GDP growth slowing over 2018 by more than the RBNZ had expected and with downside risks to 2019 growth accumulating, there is still the risk of an OCR cut in 2019," Turner says.  

Stephen Toplis, head of research for BNZ, says that while the weak data has made some people think the central bank should be rushing to lower interest rates "for us it means nothing of the sort." According to Toplis, the central bank doesn't target growth.

"It targets maximum sustainable employment and CPI inflation. Only if slower growth forebodes lower inflation and a higher unemployment rate would a cut be demanded and, as things stand, there is no evidence of this."

The New Zealand dollar rose to 69.02 US cents from 68.73 cents immediately before the announcement. It last traded at 69.28 US cents. 

(BusinessDesk)

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