Roger J Kerr with some questions for the RBNZ to consider in the run up to the new Governor's first Monetary Policy Statement next month

By Roger J Kerr

It will certainly be interesting to see the RBNZ’s take on recent developments within the New Zealand economy, the world economy and global financial/investment markets when they release their first Monetary Policy Statement under Adrian Orr’s leadership on 10 May.

In terms of the outlook and risks around inflation and employment trends, the RBNZ will need to consider a raft of changing scenarios and developments:-

• The dramatic 30% increase in crude oil prices to US$74/barrel (Brent) over recent months as oil markets price-in the possibility of reduced Iranian supply if President Trump plays hard-ball on the renewal of the sanction agreement.
• Both US long-term and short-term interest rates rising sharply and the implications for the US economy and interest rate relativities for other economies.
• The implications of a lower NZ dollar value on tradeable inflation forecasts.
• The lack of recovery in New Zealand business confidence following the change of Government last October. Manufacturing confidence and activity has also fallen sharply away.
• Whether business firms will need to pay up higher wages to retain/attract skilled workers and will those increase wages costs be passed through into higher product/services selling prices.
• How would the NZ economic growth outlook appear in the event that key export commodity prices for dairy, forestry and meat reduced from recent highs?
• Are their current forecasts for residential property prices in 2018 and 2019 realistic against reduced foreign investor interest, potential tax changes for property investors, reduced immigration inflow and higher long-term interest rates?
• How likely is a full-out trade war between the US and China and what are the implications for the NZ economy?
• Are Government policy changes, such as the banning of new oil and gas exploration, a game changer for foreign investors coming into the NZ economy?
• How sustainable are NZ 10-year Government Bond yields at 2.90%, now below rising US 10-year Treasury Bond yields at 2.96%. When and how will the normal NZ “risk premium” or margin above US bonds be restored?

I am sure others could add to this list. The implications being that there is now a lot of change occurring for the economic outlook and thus around interest rate movements that we have not experienced in recent years.

Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets.