An inflation slowdown is becoming more apparent as higher interest rates hit demand and immigration eases labour supply issues, the NZ Institute of Economic Research says.
The NZIER report, released ahead of today’s Reserve Bank announcement, concludes there will be “no further OCR increases in this cycle”.
At 2pm today the RBNZ will release its last Monetary Policy Statement for the year, including new forecasts for where it sees the cash rate in a year’s time.
“The easing in inflation pressures in the New Zealand economy affirms our expectation the RBNZ will keep the OCR on hold at 5.5 per cent for the coming year,” said NZIER principal economist Christina Leung.
“We expect a return of annual CPI inflation to be within its 1 to 3 per cent inflation target band in the second half of next year, allowing the central bank to move the OCR to less restrictive settings from 2025.”
“Although the Reserve Bank of New Zealand started increasing interest rates in October 2021, the dampening effects on demand have become more apparent in recent months,” she said.
“Many households are rolling off historically low fixed-term mortgage rates on to significantly higher rates.
“As households pare back on discretionary spending in the face of higher mortgage repayments, the effects of weaker demand are broadening across the New Zealand economy.”
Recent indicators point to this shift in the economy from constrained supply to weaker demand being a key concern for businesses.
The NZIER Quarterly Survey of Business Opinion had also shown, over the Covid-19 pandemic, a sharp rise in the proportion of firms reporting finding labour as the primary constraint on their businesses, reflecting the severe labour shortages over this period, she said.
“This proportion of firms has fallen substantially over the past year, as the proportion of firms reporting weaker demand as the primary constraint on their business picked up.”
The surge in net migration inflows had been a key driver behind the remarkable turnaround in labour shortages, she said.
Although there was an increase in the number of New Zealand citizens leaving the country since international borders reopened, this has been more than offset by the number of people moving to New Zealand from other countries.
Annual net migration inflows are estimated to total over 118,000 for the year to September 2023.
“So far, the impact of these net migration inflows has been more apparent on the supply side of the economy, Leung said.
“However, we expect strong migration-led population growth to support demand across a range of sectors from 2025. In particular, we expect stronger housing demand to underpin a recovery in construction activity.”
NZIER forecasts annual average GDP growth to ease to just over 1 per cent over the coming year before picking up towards 3 per cent over 2026.
After a series of positive signs of inflation easing, markets are even more optimistic, picking a rate cut as early as May and as many as three cuts through 2024.
But don’t expect RBNZ Governor Adrian Orr to soften his tone on the inflation fight.
Any public admission from Orr or the Monetary Policy Committee that they are feeling sanguine about the inflation fight would only fuel market enthusiasm for cuts - effectively weakening the impact of current settings and making the job harder.
As Westpac chief economist Kelly Eckhold puts it: “We think the RBNZ’s objective will be to try to maintain recent tighter financial conditions by talking tough but doing little in 2024.”
“We anticipate that recent progress on tradables inflation will be acknowledged and incorporated into the RBNZ’s short term inflation forecasts,” he said.
“But we also see the RBNZ continuing to emphasise the medium-term risks to inflation given that the level of inflation remains high and core inflation pressures, including non-tradables inflation, are yet to significantly moderate.”
That suggests we won’t see the RBNZ giving much away in its forecasts, which currently don’t point to cuts until the end of 2024.
But BNZ head of research Stephen Toplis does see some room for the forecast rate track to move.
“There is the known versus the unknown. And the known indicates there is little reason for the RBNZ to publish a rate track, in its November 29 statement, which is any higher than it did when it produced its August missive,” Toplis said.
“The question is, how much lower is it prepared to push that track? Currently, financial markets are pricing in almost three cash rate cuts in calendar 2024.
- Full coverage of the RBNZ decision live here at 2pm