Kiwibank economists hit back over rival bank’s potentially ‘reckless’ OCR hike forecast

Kiwibank economists have pushed back over rival bank economists making the case for three Official Cash Rate hikes this year.

Kiwibank warned such a move could be “reckless” and risked inducing another recession.

Yesterday, ANZ economists changed their interest rate outlook, forecasting we could now expect three consecutive Official Cash Rate (OCR) hikes – in July, September and October.

That would bring the OCR to 3%, up from its current level of 2.25%.

But Kiwibank economists argue heightened uncertainty around the Middle East conflict is causing households and businesses to hunker down.

“Raising interest rates is tone deaf, and potentially reckless,” they said.

“Both businesses and households are struggling with increased costs, not surging demand.”

Kiwibank economists warned raising interest rates too soon “risks a repeat of past mistakes, potentially inducing a recession”.

“This is not a demand story, this is not Covid.

“Households and businesses who’ve already seen their costs rise don’t need a rise in interest rates to dampen their demand.”

Instead, they argued the Reserve Bank’s (RBNZ) best course of action is to “watch, wait, and weigh up” the facts once they have the information in front of them.

“The RBNZ have been clear on one thing, which is that there won’t be any knee-jerk reactions from them. They don’t feel pressured to pick a move too early, and we agree.”

ANZ chief economist Sharon Zollner said the RBNZ committee would not want to repeat the mistake of the Covid era, “when policy was kept too loose for too long”.

“Essentially, we see the RBNZ becoming too uncomfortable with an OCR in stimulatory territory as inflation inevitably rises,” she said.

Zollner said there were “solid hints” in the RBNZ’s statement last week that she expected them to conclude “the risks of going too late outweigh the risks of hiking too soon, as long as the OCR is not considered contractionary.”

But she said all forecasts should be taken with a “generous pinch of salt”.

“It is not a given that hiking the OCR this year will prove to have been the right thing to do, in the fullness of time [insofar as we will ever know],” Zollner said.

ANZ had previously been forecasting the first hike in December, with the OCR needing to increase to 3.5%.

“We are flat-lining it at 3%,” Zollner said, saying the hikes would be “very potent”.

The Kiwibank economists said New Zealand was likely to see a contraction in economic activity in the current quarter, though this won’t be played out in data for months to come.

“[The second-quarter Consumers Price Index] isn’t out until July, after the RBNZ’s decision, and to know if inflation sticks around, we really need to see Q3 data at the very least.”