New Zealand has copped one of the most aggressive rate hiking cycles in history - has it caused enough economic damage for the Reserve Bank to pause? Video / NZ Herald
ANALYSIS
With a carefully worded and nearly (but not quite) neutral Monetary Policy Statement the Reserve Bank has painted a picture of the New Zealand economy walking a tightrope.
To one side, and dominating recent headlines, there is the risk that a slowing Chinese economy and falling prices for NewZealand exports might drag us down into recession.
To the other side is the ongoing risk that inflation may prove to be more deeply embedded and persistent than hoped.
On balance (or to stick with the metaphor, to stay balanced) that represents a shuffle closer towards the recessionary risk.
The RBNZ moved its forecast track to show the OCR peaking at 5.59 per cent in the second quarter of 2024, above its current level of 5.5 per cent.
That doesn’t mean another rate hike is coming, just that it is possible.
The new peak to the RBNZ’s projected rate track still leaves things weighted towards no further hikes. (with the hypothetical peak of 5.59 per cent sitting closer to 5.5 per cent than 5.75 per cent).
The RBNZ also moved its first projected cut out to the first half of 2025 - that might be more likely and just as painful for mortgage holders.
Speaking at the post-MPS press conference today Orr described that recessionary risk as the larger of the two.
But the “hawkish” rate track shift seems to be more to do with timing.
“In the near term, there is a risk that activity and inflation measures do not slow as much as expected. Over the medium-term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and overall New Zealand export revenue,” the statement said.
That’s the logical stance for the RBNZ which must trade off inflation and unemployment risks.
As much as the dairy price slump and the Chinese economy is now crowding it out of the economic news cycle, inflation remains very much outside the Reserve Bank’s target range (at 6 per cent vs the target of 1-3 per cent).
Meanwhile, unemployment remains safely below targets - for now at least.
Adrian Orr also says the forecasts still show the way to a “soft landing” for the economy with inflation back in its box and unemployment projected to peak at the historically moderate level of 5.3 per cent by 2025.
He described the economy as “evolving broadly as anticipated”.
Mark Smith, senior economist at ASB, described it as “a hawkish hold”.
“We still view there to be a high hurdle to OCR moves,” he said. “We remain comfortable that 5.50 per cent will be the OCR peak in this cycle but note some risk of more monetary restraint being necessary if domestic inflation readings fail to quickly subside.”
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Abhijit Surya, Australia & New Zealand Economist with Capital Economics, noted that the “particular significance was the RBNZ’s upward revision to its nominal long-term neutral rate from 2 per cent to 2.25 per cent”.
“The committee noted the upward revision to its long-term neutral rate would put “slightly more upward pressure on the OCR over time.
“However, we don’t take that to mean the bank will hike rates again. Rather, we think the RBNZ will be willing to tolerate a more protracted period of restrictive policy settings than was previously the case.”
Others, such as ANZ chief economist Sharon Zollner, noted Governor Orr’s neutral tone but saw the forecast shift as a more significant sign that another rate hike is coming.
“Although the governor was at pains to downplay the small lift in the OCR track as any kind of signal as to the likelihood of future moves, it was a small but clear step in the direction of further hikes. We continue to forecast a 25bp hike in November,” she said.
“As before, our forecast for a further hike is predicated on no global sideswipe. China’s economic outlook tops that risk list currently.”
CoreLogic NZ Chief Property Economist, Kelvin Davidson, said the implications for the housing market were pretty neutral.
“Those with an existing mortgage due to be repriced from an older/lower rate up to current levels in the coming month or two will certainly be pleased to see the likelihood of a stable OCR for the next little while at least.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
