While Reserve Bank governor Graeme Wheeler sees positives for New Zealand’s economy in migration and rising commodity prices, he has concerns about the global economic outlook, especially in Europe and China but most of all with the policies of US President Donald Trump’s Administration. Mr Wheeler said there was an "equal probability" that the next OCR adjustment could be up or down.
"We consider the balance of risks for the global outlook to be downside.
"For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced," Mr Wheeler said a presentation at Craigs Investment Partners’ investor day in Auckland yesterday.
He said if New Zealand’s economy developed in line with the Reserve Bank’s economic projections, which were based on several assumptions, the OCR would remain at its current level over the next two years.
In response, the ASB bank maintained expectations of a gradual tightening of the OCR, starting in late 2018, while Westpac said the OCR would be on hold "for the foreseeable future".
Mr Wheeler said while the outlook for global growth had improved during the past six months due to rising commodity prices and stronger business and consumer sentiment, several major sources of uncertainty existed in Europe, China and the United States.
"The greatest source of uncertainty relates to the US Administration policies in respect to its ‘America first’ policy platform," Mr Wheeler said.
Westpac economist Sarah Drought said risks on the global front were "skewed" towards the negative.
"The main area of concern is the increased protectionist focus in the US under President Trump, particularly in regards to China," she said.
She said Mr Wheeler had noted an increase in trade restrictions could have a marked dampening impact on global activity, which would spill over to New Zealand through weaker trade.
Mr Wheeler said while substantial US fiscal stimulus could be positive for global economy growth, the prospect of a marked increase in protectionism, when global trade was growing slowly and trade disputes were increasing, would be expected to have sizeable effects on the global economy.
There were several uncertainties concerning New Zealand’s economy, including commodity prices, the exchange rate, migration, the housing market, and household saving, Mr Wheeler said.
"The greatest source of uncertainty currently lies around the housing market and the possibility that imbalances in the housing market might deteriorate," he said.
Mr Wheeler said while it was fortunate house-price inflation had "moderated substantially" in recent months, it was too early to say whether that moderation would continue.
ASB chief economist Nick Tuffley said while the Reserve Bank saw positives in New Zealand migration and rising commodity prices, it also recognised negatives "stemming from the vulnerabilities of highly leveraged [indebted] households and the imbalanced property market".
