Westpac economists have lifted their expected peak for the Official Cash Rate (OCR) to 6 per cent in a new report which highlights the inflationary risks of the surge in migration numbers.
“Monetary policy is working but a historic increase in migration looks set to add demand at an inconvenient time,” says Westpac chief economist Kelly Eckhold.
More interest rate rises would be required to finish the job, he said.
Westpac now sees the OCR rising to 6 per cent by August and remaining there until mid-2024.
The current consensus of economic forecasts and market pricing suggests the OCR will peak at 5.5 per cent, with one more 25 basis point hike expected when the Reserve Bank (RBNZ) delivers its monetary policy statement next Wednesday.
There was “a great deal of uncertainty around how this rebound in migration will flow through to the wider economy. On one hand, an influx of workers may help to take the upward pressure out of wages - employers are certainly hoping this will be the case,” Eckhold said.
But in other areas, they were likely to add to already-strong demand, particularly in housing, where population growth is set to outstrip the pace of home building in the year ahead, Eckhold said.
“This uncertain balance will also have important implications for monetary policy. The Reserve Bank has long regarded migration as an inflationary force on balance, adding more to demand than supply in the near term,” he said.
“Regardless of whether that proves to be the case this time, the RBNZ has little room to tolerate any upside surprises to the inflation outlook, and a continued surge in migrant inflows is likely to be met by policy action rather than waiting to observe its impact on inflation. For this reason, we now expect the Official Cash Rate to peak at 6 per cent this year.”
Inflation was past its peak, Eckhold said.
“Consumer prices rose by 1.2 per cent in the March quarter. That saw the annual inflation rate dropping from 7.2 per cent at the end of last year to 6.7 per cent now. Annual inflation hasn’t been this low since the end of 2021.”
Importantly, inflation had now fallen well short of the RBNZ’s forecasts for the past two quarters, he said.
The RBNZ forecast that annual inflation would rise to 7.3 per cent in the March quarter.
“Households are being squeezed: living costs are charging higher, borrowing costs have risen sharply, and many have seen the value of their housing assets tumble,” he said,
“As the year progresses, we expect to see more evidence of a material slowdown in economic growth, with unemployment rates rising from their lows.”
But it was too early to celebrate success in the inflation fight yet, he said.
While the increasing pressure on households’ finances would be a significant drag on economic activity, the rapid turnaround in net migration and population growth would put a floor under the economy.
Inflows of new migrants exceeded departures by 65,000 in the year to March. That compared to a net outflow of 20,000 people in the previous year.
“New Zealand’s strong labour market is continuing to attract more people to our shores,” Eckhold said.
“In fact, we expect that net migration will rise to an annual inflow of 100,000 people by the end of this year,” he said.
That sharp rise in net migration will see population growth rise from just 0.5 per cent at the end of 2022 to 2.4 per cent by the close of this year.
That would be the fastest rate of population growth New Zealand had seen in decades, and it signals a large increase in many businesses’ demand base, he said.
“The impact of this is likely to be most pronounced for those businesses selling fast-moving consumer goods like groceries,” Eckhold said.
However, it would also add to demand for a range of other consumer goods and services.
“That will be welcome news for many retailers in sectors like household furnishings who have been reporting softer sales in recent months,” he said.