Kiwibank economists say the Reserve Bank should hold off making any increases to the Official Cash Rate while the country deals with the impact of Cyclone Gabrielle.
The RBNZ is set for its next review of the OCR on Wednesday, February 22. Most debate between economists is whether the central bank will raise the rate (currently on 4.25%) by 50 basis points or by 75.
However, in the Kiwibank economics team's latest First View publication, chief economist Jarrod Kerr says the RBNZ "should pause next week".
"The RBNZ can come back in April and resume tightening if required," he says.
He says talk of a 50bp, or even 75bp, hike "should be sidelined".
"The need to tighten aggressively from here has evaporated. Inflation is peaking at lower levels. And global inflation pressures are abating. Currently at 7.2%, inflation is below the RBNZ forecast of 7.5%. The balance of risks are tilted to the downside," he says
He concedes, however that "what we think they should do is not what they will likely do".
"We expect to see a hike, but the discussion should be around 0 or 25bps, not 50 or 75bps."
But in reiterating the belief that the decision by the RBNZ could be postponed to April, Kerr says "temporary relief, of all kinds, is needed in the time of crisis".
"A pause from the RBNZ next week would be welcomed by most Kiwi, and highlight that officials are cognisant of the economic damage being inflicted. The Government has called a national state of emergency. There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Many businesses and households have also lost income with an inability to trade during the flooding. Guesstimates of the total economic impact are now in the billions, not millions."
Kerr says the next phase will be the clean-up and rebuild and we will see a sharp lift in economic activity as the nation rebuilds.
"Unfortunately, the construction industry is already operating at full capacity, with a shortage of labour. Existing projects may be postponed as we divert resources to the areas most in need. And the rebuild will take many months, possibly years in parts.
"The rebuild will be inflationary, especially in construction related costs. We may find there are shortages in materials, and our capacity to deal with the workload will be tested. And inevitably, there will be implications for insurance premiums. We’d expect the RBNZ to look through the impacts of the disaster, with the spike in economic activity and inflation likely to be temporary.
"That’s what we think the RBNZ should do. What we expect the RBNZ will do, however, is deliver a 25bp or 50bp hike. We believe a 75bp hike is well and truly off the table. RBNZ officials are concerned about the path of inflation. And they may want to keep their foot firmly on the brake. But we expect to see a more moderate path for interest rates. We expect a peak of 5%, down from 5.5%."
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