Pause for RBNZ

The Reserve Bank of New Zealand's cash rate meeting on Thursday will be an interesting one with many expecting June's 25-basis-point rate hike to be followed with another similar move.

While the strong argument to hike again is the RBNZ's view that it is appropriate to gradually remove policy stimulus as underlying inflation pressures are expected to increase, recent data releases indicate inflation and growth are both weaker than projected. As such, it may seem the RBNZ might prefer a pause this time.

Inflation, which was the foremost on the RBNZ's radar at the last policy, has turned less benign than its expectation with the June quarter inflation rising 0.3 on-quarter compared with RBNZ's projection of 0.5 per cent. Annual inflation rose 1.8 per cent versus RBNZ's 2.0 per cent projection.

GDP growth for the March quarter was also weaker than RBNZ's projection at 0.6 per cent compared with projection of 0.8 per cent.

The RBNZ had listed several factors when it made its rate hike in June including strong growth in Asia, ongoing growth in Australia and recovery in the United States. While Asian and Australian growth continue to remain strong, recent data from the U.S. shows that pace of recovery in that region is faltering to such an extent that the Federal Reserve has pledged it will consider further monetary stimulus if growth weakens further.

Locally, apart from benign inflation and lower-than-expected growth, credit growth overall also has remained weak. Latest available data shows business loans fell 7.6 per cent on-year in May and consumer loans dropped 2.5 per cent. The pace of growth in agriculture loans slowed to just 3.3 per cent in May and even housing loan growth slowed to 2.9 per cent.

Mortgage approvals in the week ended July 16 was 20.1 per cent lower on-year.

All in all, all data released since the June monetary policy statement point towards slowing growth in the economy, and the need for the RBNZ to maintain monetary stimulus at least till such time that inflationary pressures do not build up.

On the interest rate side, the impact of the RBNZ's 25-basis-point hike has been felt where it matters the most, that is, on floating mortgage rates. Fixed mortgage rates for terms over two years have fallen in line with the drop in swap rates but with a greater percentage of mortgages now on floating rates, the effect of drop in fixed mortgage rates may not be widespread.

As far as banks' margins are concerned there seem to have been some favourable impact after the June hike, as short-term deposit rates have risen less than 25 basis points and long-term deposit rates have fallen.  90-day Treasury-bills has seen some upward pressure only in recent days in anticipation of a rate hike, with the rate at 3.28 per cent on Monday from 3.13 per cent a month earlier.