Extra interest in call by RBNZ tomorrow

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

There will be a lot more interest than normal in the Reserve Bank’s quarterly monetary policy statement and official cash rate (OCR) decision tomorrow, after stronger-than-expected labour market data out earlier this month pushed back market expectations for rate cuts.

ANZ went out on a limb two days after the data showing unemployment had risen just 0.1 point to 4.0 percent in the December quarter — following news in late January that annual inflation was at 4.7 percent in the final quarter of 2023, but non-tradeable (domestic) inflation was a higher-than-expected 5.9 percent — when its chief economist predicted the RBNZ would hike rates by 25 basis points this month and again in April, taking the OCR from 5.5 percent to 6 percent.

The decision this month was “a line-ball call”, ANZ said in its forecast, and if the RBNZ didn’t hike now, “we think they will in April, unless we start to see meaningful downside surprises”.

Before the latest data came in from the end of last year, the market view was that inflation was coming under control, there was no need for any more rate hikes, and the RBNZ would begin cutting by August this year.

The consensus view remains that no hike is required, but there is an expectation the bank will be “hawkish” in pushing back against any notion of rate cuts in the near future.

ASB says there has been a mix of conflicting signals lately and thinks the RBNZ will wait until at least November before cutting the OCR.

“The run of data have shown flat or weaker than expected activity data, with pricing data ranging from well-behaved to persistently strong,” its chief economict told the NZ Herald.

BNZ points to partial indicators over the last week that show there is no need for a rate hike tomorrow, including retail sales down 1.9 percent by volume in the December quarter (against an expected 0.2 percent fall), and concrete production down 12 percent on a year ago. “It all fits with our view that interest rates do not need to be lifted any further, even though one cannot rule it out given the recent rhetoric from the central bank.”

Kiwibank expects more tough language on inflation risk but for rates to remain on hold. It says forecasts in the monetary policy statement will make for interesting reading, especially “any updates on the impact of the domestic surge in migration”.

ANZ continues to see the risk of sticky inflation as high.

While raising rates against the backdrop of a weak econcomy was risky, “our expectation is the RBNZ will conclude that not hiking is a riskier option,” said ANZ chief economist Sharon Zellner. If not tomorrow, they expected an “extremely hawkish tone and an OCR track that sets a low bar for a hike in April”.