2015 will be a year of contrasts. The Canterbury rebuild will begin to fade, but recent increases in net migration will finally begin to drive growth. The RBNZ faces no inflation, but will be increasingly trying to cool the housing market. Cheap global money will work against these efforts.
Domestic demand will be strong, but exports will suffer. Slowing growth in China and Australia will drag on exports. Dry conditions will dent rural production, heaping further pain on farmers on top of sharply lower dairy prices.
The global economy is bracing for very weak inflation, or even deflation in some parts. New Zealand will import these low prices, which account for half of the RBNZ’s inflation target. The other half, domestically generated consumer price inflation, is also soft. So there is no inflation in the economy for the RBNZ to control, except in the Auckland housing market.
…except in housing
The RBNZ is in a difficult policy position. Moderate growth, subdued inflation and global risks suggest monetary policy should be supporting growth. But Auckland house prices, which rose nearly 16% over the past year, suggest the RBNZ should tighten. On balance, the RBNZ cannot justify any OCR changes in 2015, but they should and will unleash macro-prudential tools to dampen a superheated Auckland housing market.