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High kiwi, drought add to conflicting pressures on RBNZ ahead of review

Friday 8th March 2013

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Reserve Bank governor Graeme Wheeler has an increasing number of moving parts to juggle in his assessment of monetary policy, with the kiwi dollar higher than forecast, a resurgent housing market and the impact of drought on economic output.

Wheeler will keep the official cash rate at 2.5 percent when he releases his monetary policy statement on March 14, according to a Reuters survey of 19 economists. He would hike by 25 basis points in the fourth quarter and again in the first three months of 2014, according to the survey's median estimates.

Traders see 27 basis points of OCR increases over the next 12 months, based on the Overnight Interest Swap curve.

The latest MPS will likely include revised tracks for the trade-weighted index, interest rates, inflation and economic growth. The TWI was recently at 76.10 - well above the 73.1 average level the Reserve Bank forecast for the first quarter back in December and ensuring inflation remains subdued to the tradable sector.

At the same time the housing market, one of the "pockets of pressure" Wheeler identified three months ago, has continued to heat up, especially in Auckland and Christchurch.

That's one of the reasons that investors will be keenly listening for more details on the make-up and timing of the use of macro-prudential tools, such as loan-to-value ratio restrictions, outlined in an RBNZ discussion paper this month. Wheeler noted a rise in the share of high loan-to-value lending throughout 2012 in the December MPS.

"Macro-prudential tools could help ease housing market pressures," said ASB chief economist Nick Tuffley. However they're only likely to have "a modest impact" compared to movements in the OCR.

Wheeler also may not want to make too definitive a statement on new tools while the RBNZ is still getting feedback on its consultation paper.

Outside of the housing market, he has little need to worry about inflation. The consumer price index fell 0.2 percent in the final three months of 2012, against the RBNZ's December forecast of a 0.1 percent increase.

Respondents to the Reserve Bank's March survey of expectations trimmed their view on consumer price inflation two years ahead to 2.17 percent from 2.27 percent in the January survey.

The outlook for global growth has improved in the past three months, as the Reserve Bank of Australia noted this week but for New Zealand, the widening effects of late-season drought in the North Island poses a risk to gross domestic product.

Deutsche Bank chief economist Darren Gibbs says it could "easily wipe 0.5 percent off economic growth over the next 12 months" if rains don't arrive in the next two months.

"We expect the RBNZ will aim to write a statement that is seen as 'market neutral', balancing the large number of positive and negative developments and uncertainties that could impinge on the economic outlook as the year progresses," Gibbs said in his OCR preview.

The review will be the first under the central bank's new governing committee, where the governor will discuss all major policy decisions with his lieutenants, while holding the ultimate right of veto.

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