RBNZ: too upbeat on GDP growth - ANZ

Analysts at ANZ explained that they believe the RBNZ is too upbeat on GDP growth over the coming year:

Key Quotes:

"It is assuming only a small degree of crowding out from the fiscal boost, which they are not sure about at a time when the economy is grappling with capacity pressures. 

It would be unusual for the economy to push towards 4% growth in an environment where the property market is soft.

We think there will be more seepage from a slowdown in the housing market to the broader economy.

There is a transitional pothole to cross as the business sector absorbs a new Government and the associated shift in policy direction. We’ve already seen business confidence take a hit and are closely watching other real indicators.

In saying that, risks on the inflation front look largely one way: higher. While we have a lower growth profile, we are less relaxed about the impact of government policies on the outlook for inflation, and also have a lower assumption for the NZD. The RBNZ is placing a very high

weight on low global inflation and low past inflation (which it believes has become a bigger driver of price-setting behaviour) anchoring inflation outcomes. However, we believe the economy looks set for a good burst of cost-push inflation, notably from the labour market. Modest growth (an output gap around zero) will temper that pass-through, but it’s hard to imagine a 20% plus lift in the minimum wage not flowing into some domestic price setting.

So it leaves us with a bias towards OCR hikes in time, with our views unchanged after today’s Statement. We continue to lean towards a first hike in late 2018.

However, it is fair to say that a number of questions over the timing remain. We suspect the picture for monetary policy is going to look complicated over the course of 2018, with the potential for housing, growth and inflationary signals to not necessarily provide a clear message."