RBNZ Preview: Wheeler Expected to Stand Guard

The long awaited meeting of New Zealand’s central bank is widely expected to bring no change to the record low interest rates, but the tone and outlook of the accompanying statements might spur significant volatility, taking into account the effects of China and crude oil in January.

Wellington – The Reserve Bank of New Zealand (RBNZ) is scheduled to unveil the interest rate decision at its regular meeting on January 27, following the 25 basis points cut to a record low on December 10.

The market survey expects the RBNZ to stay on hold at 2.5%, as the economic development along with anxiety on global markets remains a major reason to keep monetary policy loose, and to allow the effect of December’s cut to have its desired effect on the economy, while the weak kiwi allows the nation to import some much needed inflation.

Nevertheless, traders will closely digest comments by RBNZ Governor Graeme Wheeler, as further dovishness in his statement could send the kiwi back to its lowest level since 2009 at $0.6233 seen in September 2015.

Looking back, central bank officials lowered the main rate in December amid ongoing deceleration of global growth, fragile crude oil prices, along with inflation that remained well below the target level.

”Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions. Financial markets remain concerned about weaker growth in emerging economies, particularly in China,” the monetary policy statement in December showed.

Fitch downgrades NZ bonds

On Tuesday, Fitch ratings agency revised its outlook on the country’s government bonds to stable from positive, though it left the sovereign rating unchanged at AA.

“Fitch has revised down its assessment of New Zealand’s near-term growth prospects, as the outlooks for the prices of the country’s agricultural exports have deteriorated,” the statement says.

The rating agency estimates further slowdown in economic growth, to a pace which no longer sees New Zealand ahead of other countries with the same rating.

“Fitch estimates GDP growth (production measure) slowed to 2.3% in 2015, no longer outperforming ‘AA’-rated peers,” Fitch stated with the revision.

China

Since December’s cut, the situation in China has become more serious, especially during the first three weeks of 2016 as mediocre PMI updates from the nation’s manufacturing and services sectors induced a major sell-off on global equity markets, with the Hang Seng falling over 11% year-to-date, while the Dow Jones Shanghai has plummeted almost 18% over the same period.

Furthermore, the fourth-quarter GDP of the world’s second-biggest economy confirmed the forecast as the fresh update fell to the weakest pace since 2009.

A similar mediocre picture came from the materials production sector in December as well, which remained near the seven-year low at 5.9%. Therefore, the Beijing government’s long-term goal to transform the economy to more consumer oriented, along with weak external demand, paid the toll.

On the upside, the PBoC made decisive moves in response to the market turmoil, injecting billions of dollar via several financial tools and adding the most cash in almost three years to stabilize markets ahead of the Chinese Lunar New Year holidays.

Plummeting crude oil

Moreover, commodity markets continued to keep pressure on the kiwi and its economy as well, as crude oil prices remained under strong bearish pressure, having been locked in a steep descending trend since the beginning of October.

The world still remains flooded with crude oil as analysts estimate some 1-2 million barrels of oil are produced every day in excess of demand. Meanwhile, OPEC’s output declined only marginally in December to 32.18 million barrels per day (bpd), with Saudi Arabia pumping 7.72 million bpd in November, the highest since April last year, compared to 7.36 million bpd booked a month before.

IMF downgrade

The latest outlook published by the International Monetary Fund (IMF) gave little reason to expect a dramatic change in overall demand for crude oil as the Fund expressed serious uncertainty over the global economic outlook in the medium term.

“Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalized slowdown in emerging market economies, China’s rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States,” the report said.

Nevertheless, the IMF’s economists predicted almost an unchanged pace of growth for China, at around 6% for the next two years, while the US might lose 0.2% of growth to 2.6% on an annual basis.

The main concern came from emerging markets, especially major commodity producers with significant uncertainty, notably Russia – predicted to contract 1% in 2016 according to the report.

Struggling inflation & dairy prices

The effect of the crude oil shock, along with slowing Chinese demand, has already spilled over onto New Zealand’s macro updates, starting with the sluggish Consumer Price Index (CPI) on an annual basis during the fourth-quarter of 2015.

Statistics New Zealand showed that the CPI increased just 0.1% year-to-year, slowing from a moderate 0.4% growth booked during the third quarter amid the negative impact of falling commodity prices, while prices for food and vegetables also added to the slowdown of consumer price growth during the observed period.

In addition, the outlook offered no major shift, with Westpac’s senior economist Michael Gordon still predicting inflation will remain below the 1-3% target band until the end of the year.

“The RBNZ’s focus rightly remains on medium-term inflation, but the reality is that the longer that inflation remains below the target range, the harder it will be to justify looking through it,” Gordon mentioned. “We expect the OCR to be cut further to 2% this year.”

On the upside, one of the most important segments of New Zealand’s economy, the dairy market brought at least one piece of upbeat news despite recently stagnant prices, as the volume shipped to overseas markets reached a new record of 300,000 metric tonnes in December.

Moreover, the buoyant result topped the old record seen in December 2014 by roughly 10%, according to data.

“This is an excellent achievement by our sales and logistics teams and it is gratifying to finish 2015 on a high with this record export volume,” Fonterra managing director for Global Ingredients Kelvin Wickham mentioned. “We have seen unprecedented global volatility due to geopolitical events over the past year. The dairy market has been a tough environment globally, so we are pleased to achieve record export volumes despite the challenges.”

It appears likely that the RBNZ, and other central banks of commodity exporting countries will further loosen monetary policy this year, as Westpac argues, but this is unlikely to be the month.

Original Article: W B P Online[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]