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RBNZ Faces Uncertainty Over New Labour Government’s Direction

 
BY: STEVEN KNIGHT, SENIOR MARKET STRATEGIST

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The past week has zipped past with the newly installed Labour Government readying their swords to slash away at the prior incumbents work. Understandably, there is plenty of concern that the Labour led social programs will erode some of the economic gains made by National over the past decade. However, the Government’s announced policies are surprisingly likely to have a larger impact over monetary policy, at least in the foreseeable future.

 

Subsequently, the RBNZ has entered a period of uncertainty over the potential changes, both to their enacting legislation and the present economic cycle. In particular, currency depreciation and inflationary pressures are all looming and this could have quite an impact over nominal interest rates in the medium term.

 

NZD Depreciation

You would be forgiven for missing the RBNZ’s latest announcement of their Trade Weighted Index (TWI) for 2018 which demonstrates a significant depreciation for the NZD. In fact, the Kiwi Dollar is presently off by around 5% and this change is yet to flow through to general import prices. Subsequently, the question remains as to when importers will raise their domestic prices to counter the cost of the falling NZD given the normal lag time of 6-9 months.

 

Fuel Price Inflation

Anyone doing lots of driving within New Zealand is already aware of something that most economists are not. Fuel prices are already on the rise in response to the NZD’s concerted depreciation. In addition, there could be further upward pressure on the way as oil prices continue to rise and OPEC discusses extending the production caps into next year.

 

Subsequently, there is likely to further rises in the near term whilst a Labour Government seeks to introduce regional fuel tax in Auckland to support infrastructure projects. So there are plenty of reasons to see a rise in inflation coming given that the vast majority of our consumption relies upon transport modes that utilise crude oil products.

 

Wage Inflation

It’s been almost a decade since most of the Western world has seen strong levels of wage growth and there is plenty of debate in economic circles as to why this is. However, there is some consensus that the large economies are likely to see a cycle of inflation in the coming calendar year as central banks, such as the Fed and the BOE, look to normalise rates and trim their balance sheets. The reality is that New Zealand has record levels of employment not seen for the better part of a decade. Subsequently, it’s interesting that as we approach the natural rate of unemployment that the Government of the day would seek to restrict immigration, especially at the lower tiers of experience.

 

The reality is that New Zealand requires those workers to remain buoyant in an era where sustained GDP growth is difficult to come by. The likely axing of various immigration programs is likely to only bring about skills shortages and wage inflation as employers desperately search for qualified employees. Further adding to wage gains is the plan to lift the minimum wage to $20.00 an hour which creates symmetrical issues for those above that level.

 

Ultimately, there are multiple factors to suggest that we are about to embark upon a cycle of inflation in New Zealand over the next 18-24 months and this brings with it plenty of scope for increases to the Official Cash Rate (OCR). In fact, this is likely to hit right when Labour wants it the least, during their campaign to increase housing and give home owners a leg up into the market.

 

Subsequently, it’s going to be interesting to see which way the RBNZ moves over the next six months with the political pressure likely to be hanging over their heads with Winston Peter’s threat of changes to the RBNZ Act. The likely course will be one of wait and see…but when inflation starts to appear the bank will have no choice but to act decisively and damn the political fallout.

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