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
Spoiler alert: the Official Cash Rate won’t move on Wednesday.
After the giddy drama of the fastest interest hiking cycle in New Zealand history - shifting the OCR from a record low at 0.25 to 5.5 per cent in less than two years - the Reserve Bank will takea breather this week.
That will leave local markets looking for clues as to how confident the RBNZ remains in May’s bold Monetary Policy Statement call: that the OCR has peaked.
In other words, rates are on hold for now but how firm is the RBNZ’s hold? How confident is it that inflation is in retreat?
Long-term, local economists are divided on this. But as far as next week’s Monetary Policy Review goes, there is a broad consensus that the Reserve Bank will be safe to sit, wait and watch for more solid data to emerge.
If anything the Reserve Bank’s position in May has been consolidated by the worse-than-forecast first-quarter GDP data that pushed the country into recession.
ANZ economists still see the balance of risks tilted towards the RBNZ eventually hiking again but say that won’t be on the table this week.
“Local data since the May MPS had been mixed, but overall supports the RBNZ’s wait-and-see stance,” said ANZ chief economist Sharon Zollner.
“First quarter GDP fell 0.1 per cent, versus the RBNZ’s expectation of a 0.3 per cent lift. The data showed clear evidence of slowing economic momentum, but there was plenty of noise too, including likely cyclone impacts.”
Demand was definitely cooling, but the “real” recession was expected later this year, she said.
“Weighing it all up, we don’t see the recent data as making a compelling case for the RBNZ to deviate any time soon from the plan that was outlined in May,” she said.
“We expect things to remain broadly ‘on track’ over the coming months, as lower oil prices and shipping costs, the easing of cyclone impacts and a significantly less-tight labour market see headline inflation steadily drop away.”
However, Zollner warns that the economy could still be resilient relative to the RBNZ’s forecasts.
Overall demand would continue to be supported by the migration surge, the housing market lifting itself off the floor and fiscal stimulus, she said.
Westpac’s Kelly Eckhold noted the data flow since May would likely have given comfort to the RBNZ that its on-hold stance is appropriate – at least for now.
Westpac chief economist Kelly Eckhold.
The lower-than-expected March GDP data meant the economy started the year in a slightly less overheated position than might have been feared when the RBNZ produced their May statement, he said.
Economists at BNZ seem most confident the RBNZ won’t need to move again. In fact, head of research Stephen Toplis has suggested recent signs of inflation easing might even point to cuts coming sooner than projected.
As well as the lower-than-expected starting point for GDP, recent business confidence surveys have indicated firms are experiencing lower costs and fewer difficulties finding staff.
“The RBNZ will be satisfied with the results of the June NZIER Quarterly Survey of Business Opinion,” Toplis said.
“In short it provides very strong evidence that inflationary pressures are abating and that we are heading towards maximum sustainable employment at an accelerating rate. All of this means talk of raising interest rates again should be extinguished (for now at least).”
Barring any shocks, there was “next to no chance of a rate hike in the foreseeable future”, he said.
“We continue to believe the next move in interest rates will be down and that this will possibly occur sooner than the RBNZ expects.”
The best thing the RBNZ could do on Wednesday would be to keep the Policy Review statement short and to the point, he said.
“Perhaps something like this would do: ‘The Monetary Policy Committee today did nothing. Nothing much has changed. Why would we?’”
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
