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
Economists are increasingly at odds over whether the Reserve Bank of New Zealand (RBNZ) will need to increase the Official Cash Rate one more time to beat inflation.
Unfortunately for those looking for some economic drama in the August Monetary Policy Statement this week, that debate is all about whatwill happen in November.
When it comes to this week, there is widespread agreement that the RBNZ will do very little to shift the dial in either direction on Wednesday as it sits firmly in “wait-and-see mode”.
ANZ, which, along with Westpac, is picking the RBNZ will need to raise again, has written off any chance of a rate move next week, saying the RBNZ is firmly in “watch, worry and wait” mode.
But ANZ chief economist Sharon Zollner did expect to see some tweaks to the central bank’s forecasts since the last full Monetary Policy Statement in May.
“We expect the RBNZ to revise up its forecasts for house prices and non-tradable inflation on the back of the starting point surprises to both, but not make any large changes to the forecast profiles for either,” she said.
It was also likely to revise down export price forecasts, with associated lower incomes also a dampener for consumption, offsetting potential housing impacts.
Fonterra has dropped its milk price payout forecasts, and negative economic news out of China in the past six weeks has pointed to lower prices for New Zealand commodities across the board.
In terms of evolving risks, rising global energy prices, downside risks to China’s outlook and New Zealand’s terms of trade, stickiness of non-tradable inflation and the impact of migration on housing were all likely to be worth a mention, she said.
“If the RBNZ is looking for reasons to publish a higher OCR track than in May, it is not hard to find them, but it’s not hard to find reasons to discount them at this stage either.”
All of that adds up to expectations of a highly neutral and cautious approach from the RBNZ on Wednesday.
“The May MPS forecasts indicated cuts in the second half of 2024,” Zollner said. “It’s possible these are pushed out slightly further, but we certainly don’t expect the RBNZ’s forecasts to imply any more hikes from here just yet.”
ASB chief economist Nick Tuffley saw enough evidence in the recent data to stick with a call that the OCR has peaked at 5.5 per cent.
“Recent events have given the RBNZ enough of a glimmer of hope that no further interest rate increases are needed to ensure inflation falls sufficiently quickly,” he said.
“We expect the RBNZ will remain on hold on August 16 for what would be the second consecutive time. But the RBNZ will be very wary of the risks of prematurely declaring victory in the fight against inflation when it isn’t forecasting inflation to drop below 3 per cent for over a year from now.”
Monetary settings would need to remain restrictive for the time being, but it would be unlikely to require a higher OCR, he said.
There was still, effectively, further tightening to come as more home borrowers re-fixed their mortgages at substantially higher interest rates.
The average mortgage rate was around 5.1 per cent at present and was set to peak just shy of 6 per cent in mid-2024, he said.
People refixing their mortgage at present are rolling off considerably lower rates than are currently available. For example, ASB’s two-year rate two years ago was around 2.95 per cent. Now, all ASB’s advertised fixed rates are 6.29-7.25 per cent.
“We see this cumulative tightening as enough to keep the downward pressure on inflation and see a high hurdle for future OCR increases. Nonetheless, the OCR will need to remain unchanged until roughly mid-2024,” Tuffley said.
BNZ head of research Stephen Toplis also sees the RBNZ sticking to its guns.
“Could the RBNZ hike interest rates again? Absolutely.
“If, post-election, wage growth remains strong, non-tradable inflation proves sticky, inflation expectations are elevated and the incoming government delivers a major fiscal stimulus, then the RBNZ could well swing back into action,” he said.
“For the bank to recommence the tightening cycle, it would have to be pretty sure inflation was a problem. This being so, we stress that if the bank makes the decision to hike, it won’t be to hike once. If the RBNZ pulls the trigger, then expect a minimum of two hikes, and quite possibly more.”
BNZ’s hawkish alternative scenario was for 25-point hikes in November, February and April.
But the risks weren’t one-sided.
“Just as plausible is a New Zealand economy that goes more deeply into recession than we anticipate as lagged interest rate impacts coincide with a US recession, a further slowing in the Chinese economy, weak commodity prices and an El Nino-induced drought,” he said.
“Under this scenario, an easing in monetary conditions will come a lot earlier than currently expected. The Reserve Bank will be very aware of these two-sided risks. One could argue that, at the moment, the risk profile is very marginally tilted to the hawkish side, but certainly not so much that the RBNZ would act on it.
“It is this balance of risk that has us believing the RBNZ will print the same interest rate track.”
Liam Dann is Business Editor-at-Large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
