A finely balanced RBNZ decision

The RBNZ’s July Official Cash Review turned out to an evenly balanced decision, weighing strong momentum in early 2014 vs a recent softening in local data.   

The RBNZ had paved the way for a 25 basis points hike with a strong signal in their June Monetary Policy Statement.  However, since then the NZ economy had shown some signs of cooling:

• Business confidence had fallen from its lofty highs at the beginning of the year, consistent with the economy moving into a more moderate growth path.
• Data suggested some of the heat continued to come out of the housing market, reducing fears that this part of the economy is overheating across the country.
• Q2 CPI was softer than market expectations, putting annual inflation at just 1.6%, keeping inflation comfortably below the mid-point of the CPI target since Graeme Wheeler's tenure.
• Importantly, commodity prices had fallen much faster since June than the RBNZ expected, continuing a decline that began at the start of the year, and reducing future farm incomes and inflation pressures.
• Finally, despite the fall in commodity prices, the NZ Dollar had risen since the June MPS, putting downward pressure on future inflation.