Weaker kiwi probably not a game changer for RBNZ yet

The central bank will keep the official cash rate at 2.5% on Thursday, according to a Reuters survey of 16 economists.

The kiwi is holding below levels the Reserve Bank is forecasting for the third quarter, though that is unlikely to be enough to change its view of the interest rate outlook this week.

The central bank will keep the official cash rate at 2.5 percent on Thursday, according to a Reuters survey of 16 economists. The bank will hike the OCR by 25 basis points to 2.75 percent in the first quarter of 2014 and make further quarter-point increases in the following two quarters, the survey says.

Since the Reserve Bank's June 13 monetary policy statement, figures have shown the economy grew at half the pace expected in the drought-affected first quarter, at 0.3 percent, and annual inflation printed at 0.7 percent, the fourth straight quarter it has been below the bank's 1 percent to 3 percent target band and a 14-year low.

Meanwhile, the trade-weighted index has continued to undershoot the bank's forecasts, having tumbled from a record high in April.

"We don't expect a lot of change in the RBNZ's outlook assessment relative to the June monetary policy statement," says ASB chief economist Nick Tuffley, in a preview.

A weaker kiwi and higher dairy prices mean the bank has probably revised up its medium term inflation outlook though the bank is likely to repeat its June MPS view that it expects "to keep the OCR unchanged through the end of the year", he says.

Traders are pricing in 45 basis points of increases to the OCR over the next 12 months, based on the Overnight Interest Swap curve, up from 35 basis points at the time of the June MPS.

Prices of dairy products, New Zealand's biggest export commodity, rose 4.9 percent in the latest GlobalDairyTrade auction last week, the biggest gain since April.

The trade-weighted index was recently at 75.04, compared to 73.56 at the time of the central bank's June MPS. That is lower than the MPS forecast for an average 77.4 percent in the third quarter.

The weaker kiwi reflects broad strength in the US dollar as traders anticipate an end to the Federal Reserve's $US85 billion a month of bond buying next year.

And there are signs the New Zealand economy may pick up pace. Business confidence held at a three-year high in the second quarter, according to the Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research.

The QSBO showed a net 9 percent of firms expect to hire more workers in the next quarter, 4 percent expect to invest more in buildings, and 10 percent plan to invest more in plant and machinery. Cost and price expectations also picked up.

"The TWI remains some 3 percent to 4 percent below the June MPS assumptions, business confidence is pointing to accelerating growth ahead and Auckland house price inflation is near 20 percent," says Robin Clements, economist at UBS New Zealand. "However, with macro-prudential announcements pending, we don't expect the RBNZ to rock the boat."

Economists expect the central bank will release details of a cap on high loan-to-value ratio home lending over the next month, part of its efforts to let the steam out of Auckland's housing bubble without having to resort to a currency-boosting lift to the OCR.

(BusinessDesk)