NZ: Strong growth backs up NZD performance - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the RBNZ has maintained its view that the New Zealand dollar is over-valued and needs to correct lower and we don’t think that and the RBNZ’s view of further easing will change after today’s strong real GDP data.

Key Quotes

“The annual growth in real GDP accelerated in Q2 from 3.0% to 3.6% with growth driven by construction and exports and the growth rate was also above the RBNZ’s assumed level of 3.3%. While it could be argued that the export contribution should diminish concerns over the NZD/USD rate, which is 13-14% higher than a year earlier, the more sensible conclusion might be that the export contribution is unlikely to be sustained leaving the economy more prone to a slowdown in H2.

In any case, the real concern for the RBNZ is too low inflation. The RBNZ targets a range of 1.0-3.0% and the current level of 0.4% is well off the bottom of that range. Inflation expectations in two years’ time are currently at 1.64%, just above the low of 1.63% in Q2 which was the lowest level since 1994. Lifting inflation is the urgency here for the RBNZ and NZD strength is partly to blame according to the RBNZ and hence further easing later this year is still more likely than not.”