RBNZ still in a period of prudent assessment

At the end of July, the RBNZ met market expectations by lifting the Official Cash Rate (OCR) to 3.50%, but surprised many in the market with the explicit statement that “it is prudent that there is now a period of assessment before interest rates adjust further”.  

The September Monetary Policy Statement will provide the first chance for the RBNZ to update its economic forecasts, and provide a steer on how long they expect to be on hold before resuming the tightening cycle.   Since their last forecasts, we judge that the key drivers of their forecasts have fallen into the following categories:

Weaker than expected

• Dairy prices have been the main downside surprise.  While the GDT dairy auctions have stabilised in recent weeks, prices are still 35% lower than the start of the year, and 20% lower than the June Monetary Policy Statement.
• The Q2 CPI inflation release was lower than expected at 1.5%, leaving inflation comfortably below the mid point 2% target.  Furthermore, there is little sign of building wage inflation in the labour market.

Broadly as expected