In today's email we report on the latest OCR decision.
1. RBNZ stuck in neutral
The Reserve Bank left the Official Cash Rate (OCR) on hold at 1.75 percent as universally expected yesterday, and has left its outlook for interest rates in neutral.
"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly," Governor Graeme Wheeler said in the key final paragraph of his statement.
This outlook paragraph was unchanged from the previous full Monetary Policy Statement (MPS) on May 11 when the Reserve Bank saw the OCR on hold until early 2019. The decision was just the usual nine paragraph statement for a decision between full quarterly Monetary Policy Statements. The next full MPS is on August 10.
The main changes between May and today were around the surprisingly weak GDP figures for the March quarter released on June 15 and the currency's three percent rise since May, neither of which seemed to change the Reserve Bank's view much.
Wheeler's comment on the currency was relatively subdued, which saw the New Zealand dollar edge up to 72.5 USc from 72.2 USc shortly before the release of the decision. Currency traders had expected somewhat tougher language about the need for the currency to fall.
"A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector," Wheeler said.
He again noted the moderation of house price inflation in Auckland in particular because of last year's new 40 percent deposit requirement for landlords and slightly higher mortgage rates.
"This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand."
2. Budget stimulus helping
The other slight change since May was Wheeler's comment that the Budget's announcements, which Treasury measured as a slight loosening of fiscal policy, "should support the outlook for growth."
Wheeler characterised the recent rise in headline inflation as temporary and said gradual increases in wage and non-tradables inflation would bring inflation back to the middle of the Reserve Bank's one to three percent target band over the medium term. His language was identical to his May statement.
Economists were unsurprised by the neutral tone to the statement, but most still see the Reserve Bank tightening from midway through next year, rather than the early 2019 target date in the Reserve Bank's most recent forecasts.
The Australian-owned banks are also talking about continuing to nudge their mortgage rates higher due to funding and capital pressures, although the smaller banks, which rely more on local term deposits, are growing lending quickly and keeping their rates low. This slowing of lending growth by the big four banks is effectively tightening monetary conditions slightly.
"We still hold the view that the RBNZ will likely tighten next year, given our belief that the economy will grow at a rate that will gradually eat into capacity," said ANZ's Cameron Bagrie.
"However, the RBNZ is some way away from embracing that mind-set. It will not react until it sees broad-based inflation," he said.
Westpac's Michael Gordon said he saw the Reserve Bank on hold all through 2017 and 2018.
"The RBNZ needs to keep rates low to ensure sustained strength in domestic activity and a rise in underlying inflation pressures back to levels of around 2 percent," he said.
ASB's Nick Tuffley said he expected the OCR to remain on hold until late 2018. He also noted the Reserve Bank's tamer-than-expected language on the New Zealand dollar.
"While the RBNZ’s language around the higher NZD remained factual and similar in tone to previous statements, some market participants may have been looking for a stronger attempt to talk the currency down," he said.
3. Tighter credit, NZ$ offsets other strength
Overall, the Reserve Bank's neutral stance reflects the various offsetting forces seen since its May statement.
Fiscal policy has eased somewhat in Budget 2017 and the economy is still rumbling along with a growth rate of around three percent.
However, the currency's rise and the tightening of lending conditions along with slightly higher mortgage rates from the big banks have effectively tightened conditions.
The net result was neutral from a Reserve Bank point of view.
4. Labour blows off foot
Labour’s momentum this week in the wake of the Todd Barclay scandal stalled to a grinding halt with revelations yesterday it bought in international students to volunteer during the election campaign and then accommodated and organised them poorly.
Labour was accused with “industrial strength hypocrisy” over the incident, which also revealed a dysfunctional and unsuccessful relationship with its former Chief of Staff Matt McCarten.
The incident is an awful look given its recent announcement of a policy of limiting international student arrivals and campaigning against migrant abuse.
Newsroom's Sam Sachdeva has all the details in this piece over at Newsroom, including the potential the volunteer scheme may have breached work visa and employment rules.
Labour Leader Andrew Little apologised and Labour's Party organisation has taken the operation back in-house off McCarten, but the damage was done.
5. Migration winds behind Winston
In another sign that New Zealand First is set to feature strongly in an election debate about migration, net migration hit a fresh record high of 72,000 in the year to May.
New Zealand First’s opinion poll support has been correlated since its foundation with rises and falls in arrivals of non-New Zealanders as a percentage of the population.
Statistics New Zealand reported there was a record high net migration gain of 73,300 non-New Zealanders in the year to May, which equates to 1.6 percent population growth. The non-New Zealander long term arrivals of 98,377 represents 2.1 percent of the population. That would equate to a poll rating for New Zealand First of around 10 percent if the correlation holds, and put Winston Peters firmly in pole position to negotiate as the king maker.
“The continued high level of net migration in the May 2017 year was driven by non-New Zealand citizens migrating to New Zealand,” population statistics senior manager Peter Dolan said. “Of the 130,400 migrant arrivals, 3 out of 4 were non-New Zealand citizens.”
Of the 98,300 non-New Zealand citizen arrivals, 12 percent were from China, 10 percent were from the United Kingdom, and 10 percent were from Australia. Annual migrant arrivals from India fell 31 percent to 9,200 in the year, mainly due to a 40 percent drop in student visa arrivals.
Migrant arrivals from the United Kingdom rose 12 percent to 15,100 and rose 59 percent from South Africa to 5,000, which helped more than offset the fall from India.
Work visas rose 5,500 to 44,500, while student visas fell 4,000 to 23,700 and residence visas rose 1,600 to 16,700.
6. 'Too many guns, not enough cops'
Another issue likely to feature on the election campaign is law and order, and in particular the issue of police numbers and the growing use of guns.
Newsroom's National Affairs Editor Shane Cowlishaw covered the release yesterday of the Police Association's manifesto in depth.
Tackling the growing methamphetamine, gang, and fleeing driver problems were singled out as important for the country, as they continue to proliferate.
But the difference, new President Chris Cahill urged, was that both staffing levels, and New Zealand’s firearms problem, were reaching breaking point.
He also called for a move to increasing police numbers in line with population growth, rather than in politically-driven fits and starts.
7. 'Don't get antsy with Aussies'
Newsroom's Foreign Affairs Editor Sam Sachdeva covered Foreign Minister Gerry Brownlee's appearance before the Foreign Affairs select committee yesterday and found the new minister in an upbeat mood despite the dramas of recent days.
He was also in a magnanimous mood towards Australians.
Brownlee said the Government had no plans for reciprocal restrictions on Australians living in New Zealand, and was keen for Kiwis to echo the findings of a recent Australian poll showing most think we are their best friends.
“It worries me sometimes that we get too antsy about Australians, but the reality is that whenever you are anywhere in the world, New Zealanders and Australians are together, they’re very good friends," he said.
Sam's full piece that includes Brownlee's latest comments on the thorny issue of the Israel-Palestine resolution is here on Newsroom Pro.
8. A surfeit of cash-only bids
Getting away from Government and the Parliament, I took a look overnight at a landmark study of how the stock market is working from the point of view of takeovers.
Bell Gully have published a study of all 69 takeovers since the Takeovers Code was introduced in 2001. It found that only five percent of the deals were contested and 89 percent of the amounts paid were in cash.
There's more on the reasons for the lack of contested deals and share offers in my full piece on Newsroom.