New Zealand’s economy is trucking along nicely – and yet inflation continues to evade the Reserve Bank’s target level, according to several new reports.
HSBC’s quarterly global economics report has just been released and it says New Zealand’s economy is performing well, driven by tourism and construction.
Despite continued weakness in dairy prices, these sectors are boosting economic growth to the point that HSBC has revised its GDP forecast for the country this year.
Report author Janet Henry said that, given the better-than-expected activity indicators, they have raised their GDP growth forecast from 2.4% to 2.6% in 2016.
Despite this, the Reserve Bank still faces a challenge in getting inflation up to its “near 2%'” target on a sustained basis – with most measures of underlying inflation near the bottom edge of the 1-3% target band, she said.
“However, recent data has provided some evidence that inflation may be past its trough, making multiple rate cuts unlikely in our view.
“Given the low inflation, we expect the cash rate to be cut once more in the third quarter of 2016, to a new record low of 2.00%.”
Another indicator that inflation, while still low, might be improving came in the NZIER quarterly survey of business opinion, which was released on Tuesday.
It showed that there was a rebound in business confidence in the June quarter.
Further, it showed that demand held up over the quarter, against expectations earlier this year of a softening in demand.
NZIER senior economist Christina Leung said business profitability was improving, but inflation remains muted.
The subdued inflation outlook indicates further scope to cut the OCR, she said.
“The heightened uncertainty from Britain’s recent decision to leave the European Union suggests a greater risk the Reserve Bank will choose to cut the OCR in August in a bid to buffer the New Zealand economy against any downside risks.”
However, NZIER does expect that annual inflation will lift gradually over the coming years, Leung said.
Bank economists noted the NZIER survey was a mixed bag of results, particularly as it predated the Brexit vote.
ASB senior economist Jane Turner said that, on balance, the Reserve Bank will be encouraged with the NZIER survey results.
This is because they suggest domestic momentum has improved since March, with a firm lift in business confidence and a lift in broad inflation indicators, although they do remain at low levels.
However, ASB continues to expect the Reserve Bank will cut the OCR to 2%, largely due to the resilient strength in the NZD, Turner said.
“While we also continue to expect a cut to 1.75% later this year, there is a high threshold for the Reserve Bank to cut below 2%.
“And if business confidence remains upbeat over the rest of the year, this will reduce the odds of a cut below 2%.”
