by Miriam Bell
New Zealand has good reason to be optimistic about its economy and the inflation tide may also be turning, according to HSBC’s report “New Zealand in 2017: Outperforming Again”.
It states that strong growth is being driven by record rates of inward migration, rising construction activity and a booming tourism industry.
While weak conditions in the dairy sector were, until recently, weighing on the positive story, the dairy sector is now recovering.
Following strong GDP growth of 3.2% in 2016, HSBC expects continued above-trend growth of 3.0% in 2017.
The international bank’s chief economist, Paul Bloxham, said that means New Zealand’s economy is, once again, firing on all cylinders and experiencing a “rock star revival”.
Further, the country’s low inflation challenge may finally be over, he said.
“We expect the combination of continued strong local growth and higher commodity prices to see CPI inflation edge higher in 2017.
“We expect this to also mean that the Reserve Bank’s next cash rate move is likely to be up, although our central case does not have hikes until 2018.”
Given CPI inflation has been below the target of “near 2%” for five years, HSBC thinks the Reserve Bank might be quite cautious about lifting rates.
Bloxham said the Reserve Bank will want to see a lift in both inflation and inflation expectations and will probably prefer to respond too slowly than to choke off the early stages of a lift in inflation.
“There is always a possibility, given the strength of the economy, that inflation lifts more quickly, which would most likely result in early or more aggressive rate hikes than we are currently assuming.”
But there is little evidence of this latter scenario at this point, he said.
The end of Reserve Bank governor Graeme Wheeler’s current term in September and the general election in 2017 could also impact on the bank’s moves.
Bloxham said these factors would take second place to the fundamentals of growth and inflation in the Reserve Bank’s decision making.
“However, at the margin, these uncertainties could lead to more stable (or less active) monetary policy than would otherwise be the case.”
HSBC’s take on the future of the OCR is not too dissimilar from that held by local banks.
ANZ economists think the next move in the OCR will be up and there is potential for a hike in late 2017, but say the Reserve Bank can afford to show some patience.
ASB economists expect the Reserve Bank to leave the OCR on hold for the foreseeable future and think that market pricing of an OCR hike by the end of 2017 is getting ahead of itself.
For Westpac economists, OCR hikes are a long way off and speculation about whether the OCR could be hiked again as early as this year is more to do with markets’ desire for action than anything else.
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