(Bloomberg) -- New Zealand’s central bank may hold fire on delivering further stimulus this week as the economy performs much better than expected.
But analysts say it’s a tough call, and the Reserve Bank must weigh a stronger domestic picture against the prospects of rising unemployment and a global economic downturn. Six of nine economists surveyed by Bloomberg expect the RBNZ to hold its quantitative easing limit at NZ$60 billion ($40 billion) on Wednesday; three say the program will be increased.
New Zealand’s success in eliminating community transmission of Covid-19 allowed it to emerge early from a nationwide lockdown, while a government wage subsidy has prevented heavy job losses, protecting incomes and underpinning spending. That may change when the subsidy ends next month and New Zealand’s closed border starts to take its toll on the international tourism and education sectors, both key foreign exchange earners.
“The economy has stunned everyone with its resilience recently, and on its own this suggests less need for monetary stimulus,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “But there have also been counter-balancing developments that are negative for the medium-term inflation outlook.”
The RBNZ will publish its decision at 2 p.m. tomorrow in Wellington and Governor Adrian Orr will hold a press conference one hour later. There is no expectation of a change in the official cash rate after the central bank pledged to keep it at a record-low 0.25% until at least March next year.
Six weeks ago, the RBNZ said there were downside risks to the economy from the coronavirus pandemic and indicated it was prepared to do more if needed, fanning bets it could increase its Large Scale Asset Purchase program to NZ$90 billion or more. The bank also said it would develop a broader range of deployable policy tools, such as a term lending facility or negative rates, and update the market on its plans in August.
Since then, economic data have been better than expected, indicating the economic slump won’t be as deep as the RBNZ projected in its last set of forecasts in May. Retail card spending rose for a third straight month in July, according to data released today, while a report last week showed employment fell just 0.4% in the three months through June, much less than the 2% drop predicted by economists. The jobless rate unexpectedly declined to 4%.
On the other hand, inflation is likely to weaken below the 1-3% band the RBNZ targets as a stronger currency makes imports cheaper and wage inflation is suppressed. The New Zealand dollar has risen more than 10% against the greenback over the past three months.
Economists also see the unemployment rate tracking toward 10% by the end of the year, while the inability to get skilled foreign workers into the country is delaying projects and may impact on future investment decisions.
“Despite the vigor of the bounce out of lockdown, a very challenging period lies ahead,” said Liz Kendall, senior economist at ANZ Bank New Zealand in Wellington, who believes the RBNZ will increase its stimulus tomorrow. “The recession caused by the closed border and the global growth hit is only just getting started. An aggressive approach to monetary policy makes sense.”
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