Central Bank Previews: RBA, RBNZ, ECB

RBA: The RBA will likely leave the cash rate unchanged at 4.75% in June. While it's challenging to predict the time of the next rate hike, we believe August would be a suitable time with sufficient indicators illustrating the impacts of the flood, the trend of inflationary outlooks as well as global economic developments. Indeed, the market bets there's a 12% chance for a rate hike this month, compared with 32% in July and 50% in August.

 

1Q11 GDP was a great disappointment. GDP surprisingly contracted -1.2% in 1Q11 as the floods dampened exports. Policymakers will likely view the shortfall as temporary, thus a rate hike is warranted in 3Q11. Moreover, the rise in wage cost eased modestly during the quarter while credit growth was weak in April. However, there were still upbeat data offsetting the soft ones. Domestic demand expanded around trend, adding +1.3% to growth, despite the fall in 1Q11 GDP. Meanwhile, terms of trade jumped +5.8% in the first quarter while the RBA commodity price index rose +2.3% in May (in SDR terms) after soaring +7.3% in the prior month. On net, policymakers are not urgent to resume the tightening cycle and some more time is available for them to monitor economic indicators.

 

 

RBNZ: Negative impacts from the earthquake on growth have eased and New Zealand's recovery has shown signs gathering momentum in recent months. Economic data released in the previous week was generally upbeat. Trade surplus widened to a record high NZD 1.11 trillion in April as driven by export growth of +17.4%, NBNZ business confidence climbed +24 points to 38.3 in May and household credit also soared +1.2% in April from the same period last week.

 

Inflationary pressures have also heightened. 2-year inflation expectations have risen to +3.0%, up from the previous estimate of +2.6% and reached the upper limit of the RBNZ's medium-term inflation target. Currently, businesses are able to absorbed cost pressures through lower margin, thus easing inflationary pressures. However, pricing intentions and cost expectations in business surveys are the keys in coming months.

 

That said, the RBNZ will unlikely unwind the post-quake emergency rate cut adopted in June. In the meeting statement, policymakers will likely say that ‘current level of the OCR is likely to remain appropriate for some time'. We expect the next rate hike will be in 4Q11.

 

 

ECB: While we continue to expect the next ECB rate hike will be in July, recent weaker-than-expected data and ease in inflation have increase the downside risk of our forecast. In the June meeting, policymakers will continue to pledge the commitment to maintain price stability. Appearance of the ‘strong vigilance' reference should signal a rate hike in July. Another focus of the meeting is the new set of staff projections on outlook. We expect upward revisions on both growth and inflation forecasts.

 

Recent economic data released in the Eurozone was rather disappointing. The final estimate of PMI was revised lower to 51.6 from preliminary reading of 54.8. In April, the reading was 58. Economic sentiment indicator fell for a third consecutive month, to 105.5, in May. While consumer confidence improved, manufacturing and retail confidence deteriorated during the month. Meanwhile, inflationary pressures eased in May with the flash reading surprisingly climbing +2.7% in May after a +2.8% rise in the prior month.

 

That said, the +2% GDP growth in 1Q11 may lead to upward revision in staff projections. We expect growth will be revised to +1.9% in 2011 and +1.8% in 2012, up from March's forecasts of +1.7% and +1.8% respectively. Inflation forecasts will also be revised up to +2.5% for 2011 (March: +2.6%) and +1.9% for 2012 (March: +1.9%).

Meanwhile, we retain our view that the next rate hike will be in July. However, dependant on upcoming data, tightening may be delivered later than expected.