ANZ's economists have lowered their Official Cash Rate (OCR) forecast and no longer expect the Reserve Bank (RBNZ) to hike above 5.50% at their meeting in February.
Sharon Zollner, the bank’s chief economist, said it was looking “much less likely” that the December quarter inflation number would be surprisingly hot.
New monthly price indices, which cover 45% of the consumer price index, was released for the first time this week and suggested the next inflation number might be lower than expected.
This comes after the September inflation and labour market data both came in weaker than forecast.
Economists are still divided on whether the slowdown will be enough to offset an increase in population, gross domestic product, and house prices.
Zollner said she still sees a “solid chance” that the RBNZ will need to lift the OCR above 5.5% to get inflation back on target.
“However, we no longer see that chance as being over 50%, which means a higher OCR belongs in the risk basket rather than our central forecast,” she said in a note.
Another reason to not expect a hike is that the New Zealand dollar has been strengthening.
The trade-weighted index has been below RBNZ’s forecast, and therefore making inflation worse, but has bounced off its lows and is starting to recover.
Zollner said the RBNZ would talk tough at its November meeting, despite the improved data, as financial markets were already pricing in aggressive rate cuts.
Overnight swap rates have dropped in recent weeks, partly due to softer local data but also because of falling expectations of higher interest rates in the United States.
“If the RBNZ gives an inch, the risk is therefore that the market takes a mile,” she said.
Publishing a lower OCR track could trigger a fall in wholesale interest rates and lifting the track might be seen as a bluff by market traders.
It was likely the RBNZ would keep the OCR peak unchanged at 5.50% and remind the market that there was still a long way to go before inflation drops back into the target 1% to 3% range.
“The ducks are currently lined up but have a long way to march in formation yet,” she said.
“Getting inflation down from 7.3% to, say, 4% is relatively easy, but that last 2% could be very hard going indeed, and we do see the task taking longer than the RBNZ expects”.
Finding full employment
Nic Guesnon, an economist at UBS, said the RBNZ had historically cut interest rates while inflation was still above target and that it would do so again in the middle of next year.
He said it was clear the labour market had turned and was weakening. That will lead to less wage growth than the RBNZ has forecast.
Karen Silk told attendees of UBS’ recent conference that maximum sustainable employment would be achieved when the unemployment rate was between 4% and 5% — it is currently at 3.9%.
“The critical trigger for easing is our expected sharp increase in unemployment. We forecast the RBNZ to first cut rates by 25 basis points in August 2024, and see the OCR down to 4.5% by the end of 2024,” Guesnon said in a note.
He also said there was noticeable disinflation occurring in goods and services, which makes up two thirds of NZ’s consumer price index.
This decline in goods prices would see headline inflation fall to 2.2% by the end of 2024 and unemployment peak at 5.6%.
20 Comments
LOL. So the ANZ now admits they really had no justification for the HFL rhetoric? That somehow, this time it would be different?
Perhaps they could also explain how they believed HFL and higher house prices were going to happen given they're almost certainly mutually exclusive? (Oh right, somehow, this time it is different.)
Like I've said - trust bank economists and their infomercials at your peril.
This is Prince John's bank isn't it?
Even if the OCR reduces to 4.5% at the end of 2024, is that still not a little higher for longer? A lot will depend on whether the RBNZ sees lower interest rates pumping back into property investment or into the productive economy? Would depend a lot if they're willing to change their tune or remain the banks' bank. It is a challenge that central banks and governments are unable to align with a vision as to a healthy economy, a truer understanding of their role and purpose.
re ... "Nic Guesnon, an economist at UBS, said the RBNZ had historically cut interest rates while inflation was still above target and that it would do so again in the middle of next year."
True.
"Karen Silk [RBNZ's Karen Silk?] told attendees of UBS’ recent conference that maximum sustainable employment would be achieved when the unemployment rate was between 4% and 5% — it is currently at 3.9%."
So ... given the last unemployment reading is already months old, and the trend is clearly up, then about now, right?
Why would the RBNZ wait until the damage is done before acting? Like they showed when raising rates early, being ahead of what you know will happen is what great central bankers do.
But then ...
“The critical trigger for easing is our expected sharp increase in unemployment. We forecast the RBNZ to first cut rates by 25 basis points in August 2024, and see the OCR down to 4.5% by the end of 2024,” Guesnon said in a note.
Oh. August 2024? Nine months away? Oh. From a bank economist ... Okaaaay. (Forgive me if I take that advice with a grain of salt.) Mind you, from the current 5.5% to 4.5% in just four months suggests an almost panicked response from the RBNZ.
Since the inception of the OCR in 1999 the cash rate holding at the top of the cycle has never been for longer than 1 year. In July 2007 the RBNZ hiked to 8.25 and the easing cycle commenced in July 2008.This was the longest period that it stayed at it's peak. The OCR was raised in May this year to 5.50% - the high of the cycle according to consensus. How could these economists possibly think "this time it's different" and forecasting the cash rate to stay here for 2 years when already we have inflation trending downwards and unemployment trending upwards. If they are trying to add value to their customer base which is predominantly mortgage holders then they are implying locking a fixed rate loan for a year at the least. Only time will tell but given it seems pretty obvious now that cash rates will start falling mid next year then this is eroding any value at all.
I consider myself a DGM where dwelling (house) prices are concerned.
However, my doom and gloom predictions of flatlining dwelling prices (in real terms) for the next 20-30 years are not based upon short term fluctuations in interest rates. They are based upon the increase in aggregate supply enabled by the NPS-UD, MDRS, etc. that facilitate much higher densities in places people want to live.
Of course, this new government may upset this by going backwards to protect the "property class". If so, that's real doom and gloom for younger aspiring Kiwi adults. But it'll be short lived as they'll be punished for it come next election, or the election after.
Further, I expect voting Kiwis (who have been proved to be none to bright where tax and finances are concerned) to finally get their heads around the fact that our tax system is creating a broken economic system. Consequently, they'll be open to changes that could include a CGT, Wealth Tax, LVT, etc. and changes to depreciation to enable more business investment in productivity. In any event, these tax changes will put paid to the obscenity that is untaxed capital gains through investment in residential property.
Enough doom and gloom for you? ;-)
It's funny though that suggesting a flatlining of house price "growth", or even a reduction that could benefit the real economy and the wider society is considered doom and gloom.
It seems that those vested interests shouting DGM might in fact be projecting their own fears.
Yes and no. Depends if one wants to hold a conventional perspective. Rather than enforcing the next gen to follow a failing model, maybe the conditions encourage them to create a new, more holistically aligned model. The best we can do is provide them with the tools, which so far we don't appear to do very well.
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