February 23 2022
The Reserve Bank has lifted the official cash rate (OCR) by 25 basis points to 1 per cent.
ANZ economists are now forecasting back-to-back 50 basis point hikes for the Official Cash Rate in April and May and warning house prices will fall by as much as 10 per cent this year.
The revised forecasts published this morning come after the big spike in oil and other commodities in the past few days as the war in Ukraine and sanctions on Russia have rattled markets.
"We now see the OCR reaching a peak of 3.5 per cent in April 2023 ([he previous forecast was 3 per cent]. We now expect house prices to fall 10 per cent this year," said ANZ chief economist Sharon Zollner.
The OCR is currently sitting at 1 per cent after hikes in October, November and February.
"Oil is the biggie, with crude futures soaring to nearly US$140 at one point this week, rather than starting a journey back to US$80 as the RBNZ assumed back in February."
The price of Brent Crude futures surged to a 13-year-high near $US140 a barrel on Monday as the Biden administration confirmed it was considering an embargo on Russian oil.
Zollner said the OCR call change was primarily on the back of ANZ's updated Consumer Price Index forecasts - that now have inflation peaking at 7.4 per cent in the second quarter, rather than the RBNZ's forecast of a 6.6 per cent peak in the current first quarter.
The Reserve Bank was now "behind the game", she said.
"The RBNZ would prefer to look through oil price shocks, but right now, with inflation expectations so high and rising, they just can't," Zollner said.
Given the extreme volatility, right now forecasting oil price moves was very difficult, she said.
"But there seems little hope of the Ukraine situation being resolved quickly, and we do know sharply increasing fuel prices will be particularly visible.
"Petrol prices have a much bigger impact on household inflation expectations than their weight in the Consumer Price Index alone would suggest. And that's where things get highly problematic for the RBNZ"
ANZ Bank chief economist Sharon Zollner. Photo / Dean Purcell
"With inflation-targeting credibility itself on the line, nice-to-haves - like treading cautiously because of the risk of a harder economic landing than intended – have to be dumped over the side.
"Any upside surprise to inflation, from any source, will have to go straight into the RBNZ's forecast OCR track and their actual OCR decisions."
In its Monetary Policy statement last month the RBNZ monetary policy committee said it was very close to delivering a double-hike of 50 basis points.
Governor Adrian Orr acknowledged the risk of "higher oil prices, rising transport costs, and the impact of supply shortfalls".
" These immediate relative price movements risk generating more generalised price rises, especially given the current domestic capacity constraints," he said.
The Committee noted in its statement that "it was willing to move the OCR in larger increments if required over coming quarters".
ANZ also noted that the commodity shock of the past few weeks wasn't limited to oil.
Higher prices for New Zealand's exports would also have an inflationary effect.
"We've also seen a swath of other commodity prices jump, including dairy prices," Zollner said. "The Global Dairy Trade price index just hit its highest level since 2013."
Dairy commodities are trading at an average price of USD5,065 versus an RBNZ assumption of a moderation to USD3,500/t over the forecast period.
"While the inflation impact of export prices is smaller and less direct than with import prices, it still matters," she said.
