RBNZ: Capacity used, up but wage inflation to remain low - AmpGFX

Analysts at Amplifying Global FX Capital explain that while the RBNZ have downplayed the risk of inflation it still sees capacity in the economy as largely used up. 

Key Quotes

“Its low inflation forecasts rely much on a sense that low wage growth, low global inflation trends, lower house price inflation and low and stable inflation expectations will see a very gradual rise in core inflation.”

“Assistant Governor McDermott said that it is almost impossible to estimate a neutral, non-inflationary level of unemployment in New Zealand, and the RBNZ relies on an entire economy, output gap framework for assessing inflationary pressure.”

“He said, we estimate that capacity is just about used up, but there is a range of estimates, and that range is quite large.”

“Governor Wheeler added that our forecasts show is that the unemployment rate falling to around 4.5% and inflation rising to around 2%, suggesting that 4.5% might be thought of as the neutral unemployment rate (compared to 4.9% in Q1).”

“The record low wage inflation in the face of rapid employment growth suggests the rapid immigration, and record labour force participation is contributing to low wage outcomes.  Wheeler and McDermott’s discussion on this suggests that they see wage inflation risk still quite low.  However, the MPS is forecasting a moderate recovery in wages over the year ahead.”