Ahead of their 12 June Monetary Policy Statement, the RBNZ will be currently revising their GDP growth and inflation forecasts based on the changing economic landscape since their previous forecasts were put together in late February.
The exchange rate has remained higher for longer over this period than what they were factoring into their March growth and inflation forecasts.
Therefore, the actual starting point for the tradable inflation forecast is lower.
Their June and September quarter’s forecasts of inflation increases of +0.5% and +0.8% respectively must be reduced, thus lowering their 1.9%/2.1% annual inflation forecast through the 2015 year.
Likewise, on the assumption that Fonterra announce a substantially lower 2014/2015 milksolids payout forecast of around $7/kg later this week, the RBNZ forecasters will be reducing their 2014 GDP growth forecast from the current 3% and their 2015 GDP growth forecast from the current 3.5%.
The decrease in dairy income from last season to the next season due to price alone is close to $3 billion and this represents around 1% of GDP.
Whichever way you want to interpret it, the revised dairy numbers are significant and GDP growth forecasts have to be revised lower.
I anticipate that the RBNZ will be forced to lower their current projection of the GDP output gap at 1.5% of potential GDP by end of 2014 to something closer to 1%.
That in turn means a revision down in their inflation forecasts.
The price pressures in the building industry, however, do remain intense and it remains to be seen whether the cutting of tariffs on imported building materials in the Government’s recent budget will actually force some price decreases.
So, what do all these downward revisions in economic growth and inflation mean for the RBNZ’s forward interest rate guidance track?
The RBNZ are currently forecasting the 90-day bank bill interest rate to climb to 4.5% by June 2015 and 5% by June 2016.
Given the arguments above it is difficult to see the RBNZ keeping an additional four more 0.25% OCR increases by June 2015 after the 12 June increase to 3.25%.
My view is that they will take 0.25% off both the June 2015 and June 2016 forecasts to 4.25% and 4.75% respectively.
It could be argued that they should be reducing those forecast 90-day interest rates by 0.50%.
Source: Interest
