Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Financial markets are now pricing at least one more Reserve Bank rate hike by May in a dramatic shift since softer-than-expected unemployment data landed last week.
The tightening of odds on markets today followed a big change in forecast from ANZ economists on Friday. ANZ shifted its forecast to picktwo more hikes - one in February and one in April - which would take the Official Cash rate from its current level, at 5.5 per cent, to 6 per cent.
“We just don’t think the RBNZ committee will feel confident that they’ve done enough to meet their inflation mandate,” ANZ chief economists said.
But despite growing expectations that the RBNZ will have to hike rates again, BNZ and Kiwibank economists are not convinced.
“The fear that the Reserve Bank of New Zealand might resume its tightening cycle has well and truly taken hold,” said BNZ head of research Stephen Toplis. “It was only a matter of days ago that four rate cuts were priced before the end of this calendar year.
“While we believe the recent data flow might convince the RBNZ to maintain its tightening stance we don’t think it justifies further tightening,” he said.
“In short, inflationary pressures may not be diminishing as rapidly as the Bank would like but directionally everything is going to plan: the economy is going backwards, the labour market is easing, core and headline inflation are falling and there is a bucket-load of tightening that hasn’t yet fully impacted the economy.”
Kiwibank economists also warned that any further hikes were unnecessary and risk doing more damage than is necessary to the economy.
“Despite ongoing soft data, underlying glimmers of strength have seen markets pivot towards pricing in rate hikes again ahead of the February MPS,” Kiwibank chief economist Jarrod Kerr said.
“We disagree. And we continue to call 5.50 per cent as the peak in the OCR,” he said.
There were clear signs the RBNZ’s “heavy-handed hikes” are inhibiting household demand and hurting business, Kerr said.
“The labour market typically lags the broader economic cycle as employers hold on to employees for as long as they can, before downsizing. But unemployment should soon react to already slowing activity.
“And as inflation continues to decelerate, unemployment will continue to tick up,” he said.
“We continue to forecast the unemployment rate breaching 5 per cent later this year. The December quarter snapshot may be the last hurrah for the labour market.”
ASB economist Nathaniel Keall described the market turnaround as “stark”.
“This time last week, markets expected the OCR to remain on hold over the next two meetings, giving way to circa 90 basis points or so of easing over the rest of the year,” he said.
“The mood has swung more into hawkish territory now, with about 22 basis points of hikes priced across the February and April meetings, and the OCR only about 37 basis points below its current levels by year-end.”
Stephen Toplis, head of research at BNZ.
“For our part, we don’t think there has been a sufficient catalyst to prod the RBNZ back into rate-hike mode, but the risk is that OCR cuts could arrive a fair bit later than August as the RBNZ seeks to ensure inflation is truly back in the target range.”
Despite the better-than-expected unemployment number, there were clear signs the labour market was turning, said Milford private equity investment analyst Mihnea Enache.
“We are seeing a significant number of applications for roles within our portfolio companies, making it easier to fill roles such as truck drivers, hospitality staff and fruit pickers/packers. In some areas we are seeing upwards of 500 applications for roles that were previously difficult to fill,” he said.
“There is risk that the better-than-expected unemployment data is masking the weakness in the NZ economy, and further rate hikes by the RBNZ could seriously hurt an already struggling consumer.”
The Reserve Bank will make its next Official Cash Rate call with its Monetary Policy statement on February 28.
