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RBNZ Preview: Slightly More Upbeat But Still In No Hurry

Fuseworks Media
Fuseworks Media

Key Points: We expect the RBNZ to hold the OCR at 2.50% on Thursday (0900 NZT) following its "emergency" 50bp cut delivered last month in response to the second Christchurch earthquake.

The earthquake has clearly dented confidence (although one business confidence measure has subsequently rebounded partially) and caused disruption to the likes of regional manufacturing activity. The tourism sector is one area were we suspect to see some sharp near-term weakness. But we are also detecting pockets of improvement.

The housing market, particularly in Auckland, appears to be responding to the loose financial conditions. We believe the Auckland economy is heading into a sweet-spot and will outperform other regions. While confidence has fallen, it could be argued that the drop across some measures was not as large a feared given the circumstances. We believe the RBNZ will acknowledge these tentative signs of improvement. At the same time though, it will likely reiterate the need to maintain stimulus to ensure a more robust recovery. Given contained underlying inflation pressures and the current profile of borrowing that will give the RBNZ plenty of traction when it does come to hike, we believe the RBNZ will feel comfortable taking a patient approach. Weekly Economic Review & Preview

Review: It was inflation data for the March quarter that was the main focus of the week. While the headline increase was strong, and reflective of the current pressures on household cash flow given the rising cost of necessities, there was little evidence that these pressures were generalising into widespread price increases. Underlying inflation was relatively subdued. We believe this will be comforting for the RBNZ. Furthermore, the increasing price of necessities could be a contributing factor as to why consumer confidence has remained somewhat downbeat. The CPI for 1Q11 rose 0.8%qoq (4.5%yoy). The major contributors to the quarterly increase were petrol (0.5ppt), food (0.2ppt) and a scheduled tobacco excise increase (0.2ppt). In fact, outside of these increases, underlying inflation was subdued. Retail discounting was prevalent. Average winning dairy prices from Fonterra's latest online globalDairyTrade auction were effectively unchanged, rising 0.3%. "Spot" wholemilk powder prices fell 0.3%. The ANZ-Roy Morgan Consumer Confidence measure for April was unchanged at 101.4 following the 7 point earthquake-led reduction experienced in March. Preview: There are two major interests next week. First will be the RBNZ's decision on whether it too is starting to see tentative signs that the economy is beginning to improve (outside earthquake disruption). The second (also consistent with this), is whether the drop in business confidence last month is just temporary or something more worrying. The NBNZ Business Outlook for April (Wednesday, 1300) will be of interest to see whether the drop in sentiment after the earthquake is just a result of shock or something more fundamental. Another, less comprehensive, business sentiment survey did partially recover in April. The RBNZ OCR Review (Thursday, 0900) is really the highlight of the week (as it usually is), although we are not expecting anything too dramatic. Following the emergency 50bp cut early last month, we expect the OCR to be left unchanged at 2.5%. Overseas Merchandise Trade for March (Friday, 1045) is expected to report a monthly trade surplus of $100 million. Credit Growth (Friday, 1500) is likely to remain subdued overall, although we will again be looking for signs that business credit growth is beginning to improve.

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