RBNZ holds policy steady once again

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The Reserve Bank of New Zealand met for its monetary policy meeting on late Wednesday. As widely expected, the central bank held interest rates unchanged at 1.75%.

The decision to leave interest rates steady came amid what is seen as a strong pick up in various economic indicators. The RBNZ maintained that the OCR would remain unchanged. In its statement, the central bank retained the sentence, “We expect to keep the OCR at this level [1.75%] through 2019 and into 2020”.

The RBNZ’s monetary policy committee had ample data to asses before the meeting.

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For starters, the quarterly inflation data showed that in the third quarter, consumer prices advanced strongly. The third quarter inflation registered a headline print of 0.9% during the period. The data exceeded the median estimates which forecast a 0.7% increase.

On an annualized basis, headline inflation rate was seen at 1.9%. The RBNZ is targeting an inflation band of 1% – 3%. Inflation currently sits within the mid-price of the inflation target band.

Fuel prices posted the biggest gain to inflation. Petrol prices surge 19% in September 2018 on an annualized basis. This marked the biggest jump since June 2011.

In the September quarter alone, fuel prices rose 5.5%. A decline in the exchange rate of the Kiwi Dollar and higher fuel prices contributed to the gains. However, the officials are expected to wait and watch to confirm that there are underlying pressures in inflation.

Excluding the volatile food and energy prices, core inflation rate was seen rising 0.7% on the quarter and rose 1.2% on the year.

Ahead of the RBNZ meeting, the inflation expectations survey did not show any significant changes. Inflation expectations over the next two years remained anchored at 2.0%.

New Zealand unemployment rate falls to a 10-year low

A day before the RBNZ meeting, the quarterly employment data was released by Statistics New Zealand. The data was strongly positive as it surprised on many fronts.

The unemployment rate fell to 3.9% in a surprise as it beat estimates of the median forecasts which pointed to no change at 4.4%. The unemployment rate was at its lowest in 10-years. In the June 2008 quarter, the unemployment rate fell to 3.8%.

The employment change which measures the growth rate doubled to 1.1% in the three months ending September 2018. This was up from 0.5% in the employment change seen in the second quarter. This was also a surprise as estimate put the employment change to remain steady at 0.5%.

The labor participation rate rose to 71.1% from 70.9% in the previous quarter. However, the annual wage growth eased to 1.9% matching estimates. This was weaker than the 2.1% yearly wage growth registered during the last quarter.

The total number of people employed rose 1.1% during the quarter to 2.66 million and was seen to be 2.8% higher compared to the year before.

On the quarter, wage growth slowed to 0.5% from 0.6% in the second quarter. The decline in the wage growth was understandable as more people entered the workforce.

Statistics New Zealand commented that “While this quarter’s unemployment rate is outside market expectations, we know New Zealand has a small economy with a dynamic labor market, and large changes, both up and down, have happened before – in late 2012 and 2015.”

Wage inflation in the public sector was up 0.4% during the reported quarter and was up 1.5% on an annual basis. One of the key contributors to the public sector wage inflation was the proposed pay negotiations for teachers.

In August, an agreement was reached for negotiations on the wages for nurses.

In both sectors, wage inflation was seen rising 0.5% on the quarter and 1.8% on an annualized basis. This was slightly below the second quarter’s print of 1.9%.

The next big data set following the RBNZ’s meeting last week will be the quarterly GDP data. The report is due to be published in December.

What will the RBNZ do going forward?

Interest rates in New Zealand are expected to remain unchanged at least over the next few quarters. Central bank officials are likely to wait and assess more information before pushing rates higher. This would mean keeping a close watch on both inflation and the labor market data.

While inflation is sitting comfortably within the RBNZ’s inflation band, wage growth will be a key factor in signaling changes to underlying inflation.

The third quarter inflation no doubt got a boost from the higher fuel prices. Therefore, officials will likely wait patiently to see evidence of inflation building up.

Keeping an eye on the Kiwi Dollar will also be vital as it could potentially signal the change in the market perception of monetary policy changes.

Last but not least, the U.S. Dollar will also play a role in this aspect. The recent victory by the Democratic party which took a majority stake in the House is expected to have significant ramifications.

President Trump’s policies which have put the U.S. in a battle against some of its major trading partners such as China have been influencing the U.S. Dollar. The USD is sitting at one of the strongest price levels which has pushed currencies such as the Kiwi Dollar lower.

Crude oil prices will also need to be factored in. The U.S. sanctions on Iran which cut off oil supply (except for a few countries still allowed to import oil from Iran) also weighs in the oil markets. The next OPEC meeting is due in late November where oil-producing nations could decide on supply.

President Trump has been very vocal by asking OPEC to raise production to keep oil prices more affordable. A decline in fuel prices could potentially ease the pedal from rising inflation.

NZDUSD pops higher

The New Zealand Dollar was seen posting some significant gains last week. The currency pair was already frothy over the past few weeks, but price action was mostly consolidating near the bottom.

In October, the Kiwi Dollar slipped to a fresh two year low at 0.6424 before pulling higher in November. From a technical perspective, the NZDUSD seems to be respecting the major trend line when it was tested in the first quarter this year.

NZDUSD
NZDUSD – Weekly Chart

The decline to the two-year low coincides with the horizontal support that has been established. A strong rebound off this support level could push the currency pair back toward the same falling trend line.

A longer-term resistance level is seen at 0.7153 which could be the near-term target over the coming months. However, for this to be confirmed, price action would likely post a brief decline to form a higher low.

This could potentially confirm the upside bias in the currency pair which has been in a steady downtrend since January this year.

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