Central banks are in a global race to get inflation under control. The Reserve Bank of NZ was first to hike amid Covid, but it may be the last to cut.
Video / NZ Herald / Carson Bluck / Getty
It will be heart-in-mouth time for mortgage holders this Wednesday as the Reserve Bank of New Zealand (RBNZ) makes a big call about whether to resume lifting the official cash rate (OCR) .
Until a few weeks ago, markets had assumed hikes were done and inflation was beaten, opening thepath for lower interest rates by August.
However, stronger-than-expected labour market data has pushed back expectations for rate cuts.
Meanwhile, a big call by economists at New Zealand’s largest bank ANZ has upped the stakes and injected some excitement into Wednesday’s Monetary Policy Statement (MPS) for those watching and worrying about mortgage rates.
Earlier this month, ANZ shifted its forecast, picking rates will rise - not once but twice in the coming months.
ANZ is expecting the OCR to be raised from its current level of 5.5 per cent to 5.75 per cent this week, followed by another hike in April.
ANZ is effectively out on its own with the call, with a consensus of all other market economists saying no move is required.
But ANZ chief economist Sharon Zollner sees the risk of sticky inflation as high and argues the RBNZ may have no choice but to hike again, despite the economic fall-out.
“Whether it’s all ‘worth it’ in terms of the near-term economic pain required to achieve the goal of price stability over the medium term is not the RBNZ’s call. They have a mandated target they are legally obliged to do their best to achieve.”
Hiking into a weak economy was risky, Zollner conceded.
“But our expectation is that the RBNZ will conclude that not hiking is the riskier option. If the committee does in fact decide they need more evidence that a higher OCR is required before acting, we would nonetheless expect an extremely hawkish tone and an OCR track that sets a low bar for a hike in April.”
While market pricing has odds against a hike and no other economist has followed ANZ’s call, there is an expectation that the RBNZ will maintain a “hawkish” pushing back against any expectation of rate cuts in the near future.
“We don’t think OCR increases are necessary because inflation should moderate within an acceptable timeframe,” said ASB chief economist Nick Tuffley. “However, we now think the RBNZ will wait slightly longer, until at least November, before cutting the OCR.”
There had been quite a mix of conflicting signals, in the past few months, Tuffley said.
“The run of data have shown flat or weaker than expected activity data, with pricing data ranging from well-behaved to persistently strong.”
Areas of concern for the RBNZ would be the slower-than-expected increase in the unemployment rate and the higher-than-expected non-tradable inflation (domestic) outcome, said Westpac chief economist Kelly Eckhold.
Conversely, headline inflation, GDP data and the housing market had come in lower than RBNZ forecasts, suggesting the economy was cooling as prescribed.
ANZ Bank chief economist Sharon Zollner. Photo / Dean Purcell
“If you are looking for reasons as to why the RBNZ need not raise its cash rate... then look no further than at the swathe of partial indicators that have been released over the last week,” said BNZ head of research Stephen Toplis.
As an example, Toplis cited concrete production, which fell 4.6 per cent in the fourth quarter of 2023, down 12 per cent on a year ago.
Production had fallen in each of the last eight quarters.
On Friday, new data showed the total volume of retail sales fell 1.9 per cent in the December 2023 quarter.
“This was much weaker than all market expectations, including the 0.2 per cent decline anticipated by the market. The retail recession continues and deepens,” BNZ’s Doug Steel said.
There was no sign that consumers were stopping cutting back on spending, Steel said. In fact, the numbers suggested an even sharper cutback was on the cards.
“It all fits with our view that interest rates do not need to be lifted any further, even though one cannot rule it out given the recent rhetoric from the central bank.”
KiwiBank economists also expect the rate to stay on hold but expect some more tough language on inflation risk from the RBNZ.
“They will maintain a very forceful, hawkish bias,” said KiwiBank chief economist Jarrod Kerr. “But it is a bit like crying wolf. Being hawkish is one thing, delivering a hike is another [bite].”
Kerr adds that forecasts in the MPS will make interesting reading, regardless of the OCR call.
“Any updates on the impact of the dramatic surge in migration will also be read with interest,” he said.
“On the one hand, migration has been disinflationary, lifting the supply of workers and dampening wage pressure. On the other hand, we have a chronic shortage of housing, and rents have picked up with the rapid rise in population. More people means more demand, for everything. So inflation in general may be higher than otherwise.”
- The Monetary Policy Statement and Official Cash rate call are due out at 2pm on Wednesday.
