Paul Conway, the chief economist at the Reserve Bank of New Zealand (RBNZ), says the downward revisions to economic activity data does not mean less inflation pressure in the economy.
Market participants have been eager to hear the RBNZ’s perspective on the December quarter gross domestic product (GDP) and consumer price index (CPI) data, which were both below expectations.
Statistics New Zealand significantly revised its historical GDP data alongside the December release, which resulted in the economy being almost 2% smaller than previously thought.
In addition, last week’s CPI data showed headline inflation was falling faster than the RBNZ had forecast, although it was largely driven by cheaper imported goods.
In a closely watched speech on Tuesday morning, Conway suggested the recent data releases would not cause the central bank to significantly rethink its strategy.
He said capacity pressure—or the balance between supply and demand in the economy— mattered most for inflation targeting, rather than the overall size of the economy itself.
“Yes, lower GDP indicates weaker demand, but also that the productive capacity of the economy was lower than previously assumed. That is, the recent GDP revisions do not necessarily mean that capacity pressures in the economy are much lower than previously assumed,” he said.
The reasons for the revisions were due to weak inflation adjusted government expenditure and some methodological changes, such as how school attendance is measured.
Private demand, which was more interest-rate sensitive, had mostly been revised upwards, while consumption and investment levels in the third quarter were “almost exactly as estimated” in the November Monetary Policy Statement, he said.
On the most recent CPI data, which was below forecast, he said that non-tradable inflation was higher than the RBNZ had estimated at 5.9%.
“To sum up, monetary policy is working, with the economy slowing and inflation falling. But we still have a way to go to get inflation back to the target midpoint [of 2%],” he said.
The Reserve Bank's monetary policy committee will make its next policy decision on February 28 and is widely expected to hold the Official Cash Rate at 5.50%.
'Hawkish'
Conway’s speech was interpreted by economists as a rebuttal of recent commentary and market pricing which suggested interest rate cuts should come sooner rather than later.
Satish Ranchhod, a senior economist at Westpac, said the tone was “hawkish” and seemed to push back on expectations of policy easing in the near future.
“Overall, we view today’s comments as being consistent with our forecast that any easing in policy is still some way off. Market pricing for easing in the first half of this year still seems premature,” he wrote in a note.
Sharon Zollner, chief economist at ANZ, said the data commentary was “factual” and “played with a straight bat” but couldn’t be described as “dovish”.
“The speech did … clarify that the weaker GDP data is not a slam dunk for an imminent dovish ‘pivot’,” she wrote in a note.
“We are not anticipating a hike next month, but unlike current market pricing, would not rule one out”.
Brad Olsen, the principal economist atInfometrics, wrote on Twitter that there was no hint in the speech the RBNZ was laying the groundwork for a change in policy.
“In fact, he emphasized a number of factors that seem to support a strong stance on interest rates … Nothing forceful either way, but I’d say [it was] a gentle pushback on expectations of cuts soon”.
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