Although the attention this morning was on the election of Donald Trump as US President the RBNZ cut the OCR to 1.75% with a mild easing bias of “numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”.
It is expected that the OCR will remain at this level in the near future with inflation expected to be back within the 1-3% Policy Target Agreement (PTA) by the end of January next year – see graph from ASB Bank. The reason for this is that:
- Dairy prices have recovered considerably.
- The labour market is tightening.
- Growth is running at an above-trend pace.
- The OCR is already at an expansionary rate and the economy.
Could there be another cut in the OCR? There would be pressure if the following eventuated:
- there is a strengthening of the NZ dollar,
- increasing bank funding costs,
- any further weakness in inflation expectations,
- any deterioration in the global growth outlook.
The change of US Presidency will also be a wildcard over the longer term, with its mix of potential fiscal stimulus and trade protectionism. Trump has already signaled that he is not keen to sign TPP and he wants to reopen the NAFTA – North America Free Trade Agreement. Furthermore, he might take umbrage on the Chinese with their manipulation of the Yuan to advantage its exports and put a large tariff on its goods coming into the US. For New Zealand it may mean that they have to go down the bi-lateral agreement option in order to increase trade.
Other than the US election, Graeme Wheeler needs to be aware of the following:
- Theresa May has indicated she wants to trigger Article 50 by May 2017 – it is very unclear what the process will be and the negotiating strategy of both the UK and the EU. This could have implications for NZ trade.
- In China the increasing of centalised power of the President.
- China has a huge amount of corporate debt relative to GDP – see graph below.
- Brazil is still in recession
- Russia still has issues in the Middle East