Economic week

February 10
By Nick Clark

The Reserve Bank kept the OCR unchanged at 1.75 percent at its review this week.  No surprises there. Although the economy is strong and inflation is edging up, the Reserve Bank continued to express concern about the higher than expected exchange rate and global uncertainties and risks.  

Overall, it concluded that monetary policy will remain accommodative for a considerable period.  It warned that ‘numerous uncertainties remain’, particularly in the international outlook, and ‘policy may need to adjust accordingly’.  A safe call in the current climate.

The Reserve Bank will be comforted that inflationary expectations pushed up in the March quarter, with one year expectations up from 1.29 percent to 1.56 percent and two-year expectations up from 1.68 percent to 1.92 percent.  

Why is a rise in expectations considered a good thing?  If it comes to pass it will take inflation closer to the mid-point of the Reserve Bank’s 1-3 percent target range.  This is not only a ‘pass mark’ for the Reserve Bank but it makes deflation less likely and ultimately reduces the risk of having to use unconventional monetary policy, as has happened in a number of other countries.  

Also this week the Reserve Bank announced that Governor Graeme Wheeler will not be seeking a second five-year term when his current term expires on 26 September.  

Due to the close proximity of this date to that for the general election (23 September), the recruitment process for a new governor will start later in the year.  Deputy Governor Grant Spencer will therefore be Acting Governor for six months from the end of Mr Wheeler’s term.

Mr Wheeler’s main legacy will be his efforts to cool a rampant housing market at a time of very low consumer price inflation which at times bordered on deflation.  With interest rate hikes a blunt weapon in that environment the answer was the introduction of property lending rules.  

World commodity prices slipped 0.1 percent in January, according to ANZ’s monthly Commodity Price Index.  This is the first drop in the index since April 2016 and it is up 19.1 percent compared to January 2016.

The NZ Dollar appreciated in January so the NZ Dollar Index dropped 1.1 percent in January although it remains up 8.6 percent compared to January 2016.

World dairy prices were down 0.4 percent in January, mainly due to weaker prices for whole milk powder, while non-dairy prices were up 0.7 percent.  Beef (up 1.9 percent) and lamb (up 1.6 percent) made positive starts to the year but wool was down 8.6 percent.  Wool prices are down 30 percent for the year, mainly due to lack of buyer interest from China.  

Lamb prices in world terms are up 21 percent compared to this time last year but they are down 1.1 percent in NZ Dollar terms due to our strong exchange rate against the Pound, the Euro and the US Dollar – or perhaps more accurately the weakness of those currencies. 

Dairy prices edged up in this week’s Global Dairy Trade auction.  Overall, the GDT Price Index was up 1.3 percent, with modest gains for the two biggest products by volume, whole milk powder (up 1.0 percent) and skim milk powder (up 0.1 percent).  

Other products were mixed.  Butter (up 4.9 percent), anhydrous milk fat (up 4.0 percent) and lactose (up 12.4 percent) all posted healthy gains, but others (butter milk powder, cheddar and rennet casein) posted falls.   

The average selling price was $US 3,537 and 21,273 tonnes were sold.  Compared to this time last year the GDT Price Index is up 60.7 percent.

Finally, the Government announced this week that Budget 2017 will be delivered on 25 May.  This will be Finance Minister Steven Joyce’s first budget since taking over from Bill English.  

The Government will be keen to maintain its reputation for responsible fiscal policy, but this is an election year so expect at least a few spending and tax initiatives.  In fact, the first shot has already been fired, last week’s $503 million package to boost to police numbers.