The pressure on the Reserve Bank (RBNZ) to hike the Official Cash Rate one more time is fading fast.
Economists say it’s almost certain the rate will be left on hold at 5.5 per cent on Wednesday when the November Monetary Policy Statement is released. They have also dialled back the odds on another hike next year.
After a series of positive signs that inflation is easing across the past few weeks, markets look 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,” Eckhold 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.
“That is a quantum leap from the RBNZ’s previous forecasts of no cut until the first quarter of 2025. Our suspicion is the bank would be most comfortable with a market somewhere between where it is currently priced and what it forecast in August.”
There are three big reasons why the RBNZ will be feeling better about its position going into the end of the year, KiwiBank chief economist Jarrod Kerr said.
The first is that September quarter inflation came in below the RBNZ’s forecast.
“The RBNZ had expected inflation to remain stuck at 6 per cent. Instead, prices decelerated to 5.6 per cent. And importantly, underlying ‘core’ price pressures eased to 5.2 per cent, further away from the 6.7 per cent peak,” Kerr said.
Near-term inflation expectations have also shifted lower again following the tumble in actual inflation.
“The critical two-year ahead measure fell to the lowest in two years at 2.67 per cent. Longer-term expectations lifted, but remain within the 1-3 per cent target band,” Kerr said.
“And lastly, tightness in the labour market is quickly abating. The September quarter update was weaker than expected. The unemployment rate climbed to 3.9 per cent (versus RBNZ’s 3.8 per cent forecast). As such, wage inflation has begun turning south.”
Looking beyond November, Kiwibank believes the RBNZ’s next move will be a rate cut - not a rate hike.
“The RBNZ should soon be in a position to begin normalising monetary policy,” Kerr said.
“Inflation should be back within the 1-to-3 per cent target band next year, and on its way to 2 per cent. Employment should return to more sustainable levels. And the economy will likely be in a much weaker state than today.”
ANZ economists remain more hawkish on inflation risk, although they recently changed their forecast.
“Our central forecast no longer includes a resumption of hiking, though we still see this as a significant risk,” said chief economist Sharon Zollner.
“Recent data has been a little mixed but overall has gone the RBNZ’s way - particularly key labour market data - and it is universally expected that the OCR will not change at this meeting,” Zollner said.
“However, the RBNZ faces a comms challenge, given the market is itching to price cuts more aggressively. We therefore expect a firm tone to the policy assessment.”
While ANZ has backed off a further rate hike, it has pushed out its expectation for cuts by one quarter, to February 2025.