Reserve Bank governor Adrian Orr. Photo / Mark Mitchell, Herald montage
Reserve Bank governor Adrian Orr. Photo / Mark Mitchell, Herald montage
ANZ economists have warned that inflation is not yet beaten and restated their case for one more Official Cash Rate (OCR) rise in their latest quarterly outlook.
They also warn that New Zealand is still on track for a more serious recession in early 2024 as monetary policy starts todo its job and slow the economy.
In a report, headlined Waiting on the last domino, ANZ chief economist Sharon Zollner argues the Reserve Bank (RBNZ) will need to lift the OCR to 5.75 per cent at its November review.
Zollner noted that the ANZ expected the lagged impacts of tighter monetary policy would continue to feed through to spending and investment.
Exports would struggle in a tough global environment, with Chinese demand slowing. The labour market would continue to weaken and unemployment would rise (to 5.1 per cent by 2025).
Strong population growth might flatter overall GDP, but per capita growth would be very weak.
“So why on earth would the RBNZ hike again with all that going on?” Zollner said.
“Because they have an inflation target, not a growth target. And unfortunately, we suspect that inflation is going to prove much harder to push down once lower global goods disinflation has worked its way through.”
In the May Monetary Policy Statement, governor Adrian Orr indicated the RBNZ believed that 5.5 per cent would be the peak for this tightening cycle, although that assessment is always subject to change.
The Reserve Bank will deliver its August Monetary Policy Statement on Wednesday but is widely expected to leave the rate on hold for the second time since May.
But the ANZ has another 25 basis point (bps) hike in November built into its forecasts.
There was “clear risk” that that wasn’t the end of it, Zollbner said.
The economy was being buffeted from all sides, she said.
“And not just on the demand side: the supply side of the economy, from labour supply to weather to health to lockdowns, has been all over the shop in recent years, and that volatility still hasn’t completely subsided.”
ANZ Bank chief economist Sharon Zollner. Photo / Dean Purcell
There were numerous reasons why forecasts could be proved wrong, she said.
“One thing is certain: this story ends with a recession - a proper one. Because that’s how business cycles are defined!”
The economy entered a technical recession in the first quarter of 2023, although that was largely driven by the extreme weather events of late summer.
Many economists forecast a more significant recession in early 2024.
Even though optimism appeared to be lifting that the RBNZ could pull off a “soft(ish) landing”, there was no shortage of global issues that could change that outlook abruptly, Zollner said.
“We are sceptical that a 5.5 per cent OCR is enough to bring inflation back down to target in an acceptable time frame as things stand,” she said.
“But things never stand still. One risk we’re thinking about: there is a lot more to financial conditions than just the OCR, and global factors are not under the RBNZ’s control.
“Higher long rates, higher funding costs, a higher exchange rate, falling equity markets, tightening lending conditions... any of these could in practice do the OCR’s work for it. But that would definitely be a case of ‘be careful what you wish for’.”
