Bank economists believe inflation has likely peaked, so the case for smaller interest rate hikes is building.
ANZ, Kiwibank and Westpac economists revised their official cash rate (OCR) outlooks down, as inflation wasn’t as catastrophic in the December quarter as both they and the Reserve Bank expected.
While the headline 7.2 per cent annual change aligned with market expectations, economists from the three banks were heartened some of the domestic drivers (which the Reserve Bank can influence) weren’t as worrying as they anticipated.
Westpac and ANZ economists (who had been particularly hawkish) now see the Reserve Bank hiking the OCR by 50 points, instead of 75 points, to 4.75 per cent at its next review on February 22.
They see the rate peaking at 5.25 per cent – below the 5.5 per cent peak forecast by the Reserve Bank in November.
Kiwibank economists continue to see the Reserve Bank lifting the OCR by 50 points in February, but now see it peaking at only 5 per cent.
They went so far as to say, “The outlook for inflation, both offshore and onshore, is improving. The world war on inflation is being won.”
ASB economists acknowledged downside risks to the inflation outlook have grown, but cautioned the Reserve Bank “should not declare victory on inflation just yet”.
“Inflation looks like it will only slowly subside at best and is set to remain uncomfortably high for a while yet, reflecting a myriad of inflationary drivers,” they said.
Accordingly, they continue to expect the Reserve Bank to lift the OCR by 75 points next month and hike it in subsequent reviews to a peak of 5.5 per cent.
BNZ economists likewise see the Reserve Bank hiking the OCR by 75 points, but believe it’ll be a line call between that and a 50-point hike.
They don’t believe the OCR needs to ultimately go as high as 5.5 per cent, but are wary the problem is far from solved.
For example, after falling in late-2022, petrol prices have risen again; the key “consumers price index (CPI) excluding food and energy” measure climbed by 6.7 per cent year-on-year in the December quarter – a faster rate than in the previous quarter; and 72 per cent of prices increased – the second highest proportion since 2010.
ANZ economists said, “While the inflation environment is certainly still concerning, and does not yet point to imminent rate cuts (as markets are pricing), things are looking much better than the Reserve Bank feared.
“There is strengthening evidence that domestically generated inflation will start to ease significantly in 2023, especially once the temporary impact of restarting international tourism fades.”
Most economists had expected non-tradable inflation (changes in prices of goods and services that don’t face foreign competition, so are an indicator of domestic demand and supply conditions) to be quite a bit stronger than tradeable inflation.
They saw rising labour costs and domestic capacity constraints being key drivers of inflation, as oil prices fell.
Sure enough, non-tradeable inflation rose by 1.5 per cent between the September and December quarters – more than the 1.4 per cent rise in tradeable inflation.
But on an annual basis, ANZ economists were relatively encouraged it remained at 6.6 per cent year-on-year – below their forecast, meanwhile imported tradeable inflation was worse than they expected at 8.2 per cent.
“Easing CPI rental inflation is foreshadowed by the slowdown in rents for new tenancies, and the continued deterioration in the housing market points to further relief on construction cost inflation,” they said.
“The reopening of international tourism is putting pressure on domestic inflation, but that should be a temporary dynamic that fades as the peak summer season ends.
“As the global inflation pulse turns, New Zealand inflation is rotating into services prices and away from goods …
“Services inflation tends to be directly more driven by labour market pressures. As such, it can be quite persistent and hard to bring down …
“But forward indicators of labour demand (including employment intentions and online job ads) point to a significant reduction in demand for workers as we head through 2023.
“That should take the heat out of wage-price spiral dynamics that have become increasingly established in New Zealand.”
Kiwibank economists also noted business confidence is at rock bottom, and house prices fell for the 13th consecutive month in December.
“Rate hikes are working, already. We don’t need more outsized, catch-up hikes,” they said.
BNZ economists concluded, “Ironically, market pricing could yet determine the February OCR outcome, especially if the Reserve Bank is walking the tightrope that we think it is …
“If financial markets push strongly for a 50 point move it will be hard for the RBNZ to stand in its way.”