RBNZ's geopolitical concerns now 'extensive' as Trump faces battle on the Hill

Thursday 23rd March 2017

The Reserve Bank's concerns about geopolitical uncertainties have been upgraded to "extensive" at a time when US President Donald Trump is facing a tougher battle in winning over legislators to enact his regulatory and tax reforms and introduce major infrastructure spending.

New Zealand's RBNZ governor Graeme Wheeler today kept the official cash rate at 1.75 percent and indicated he won't be budging any time soon, provided the global environment doesn't change. Wheeler has previously aired concerns about the threat of a trade war being triggered by Trump's protectionist rhetoric and its implications for a free trading nation like New Zealand, and today singled out international uncertainties as potentially throwing a spanner in the works. He upgraded the "major challenges" posed by geopolitical uncertainty to "extensive" from "rising" in the February monetary policy statement.

The shift comes as Trump investors reassess US President Trump's ability to follow through with his ambitious plans to overhaul the tax system, introduce major regulatory reform and boost infrastructure spending a wall spanning the length of the US-Mexico border as the centrepiece. Stocks on Wall Street dropped on Tuesday when Trump warned his fellow Republicans they would face "political problems" if the opposed amendments to the Affordable Healthcare Act, known as Obamacare, which would help fund his tax reforms.

The House of Representatives is set to vote on the bill on Thursday in Washington and may flounder with 26 Republicans estimated to be against the reform.

"The Reserve Bank is understandably cautious about the global outlook and the risks out there," GMI senior economist John Carran said. "Trump started off with a hiss and a roar and now he's facing the grinding resistance of governing."

The battle on Capitol Hill to pass the healthcare reforms indicates those reforms will probably take longer to pass, and in the case of tax may even mean a reduction in what Trump can offer, Carran said.

Investors embraced those stimulatory policies as forcing the Federal Reserve to raise interest rates faster than previously indicated, however the world's biggest central bank stuck to its more gradual view when it raised the federal funds rate last week.

Wheeler acknowledged the reduction of US monetary stimulus in today's statement, something he's bemoaned over the years as making life difficult for him as it boosted demand for New Zealand's currency and sapped headline inflation by making imported goods and services cheaper.

GMI's Carran said as the Fed starts returning to a more normal monetary policy setting, US rates will rise attracting demand for the greenback, which in turn will push the kiwi lower, lift imported inflation and build the case for New Zealand's central bank to raise rates.

Complicating the equation is Trump's 'America First' view on trade which is expected to see the return of more protections for US goods and services. If the US imposed tariffs on imported goods it could trigger a trade war, posing a major risk for New Zealand as a free trading nation.

Prime Minister Bill English will deliver a major speech on trade this Friday updating the nation's strategy, ahead of a visiting Chinese delegation led by Premier Li Keqiang including senior ministers, government officials and business people. English said he plans to use the meeting to build on the existing free trade agreement.

BusinessDesk.co.nz

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