Kiwibank economists say current conditions only warrant a 25-point increase to the Official Cash Rate (OCR) and they are hoping the Reserve Bank - which has been eyeing a 75 point hike - will "meet in the middle" with a 50 point rise.
In their weekly First View publication, the Kiwibank economists - chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara - note the "profound impact" of RBNZ rate hikes to date.
"Mortgage rates have nearly tripled. And both the NZIER business survey and REINZ housing statistics [last week] give cause for caution."
The economists' comments come ahead of the release of the crucial inflation figures for the December 2022 quarter. The RBNZ is expecting a 32-year high of 7.5% annual inflation, and it has indicated that it will follow its 75 basis-point hike of November (taking the OCR up to 4.25%) with another 75-pointer at its next review on February 22. The RBNZ's currently signalling a 'terminal' OCR of 5.5% by the middle of this year.
However, the Kiwibank economists say they see "downside risk" for the inflation figure.
"That’s good news. We expect the pace of annual inflation slowed a smidge to 7.1% from 7.2%. In the quarter alone, we expect consumer prices jumped 1.3%. The latest report is expected to show a continued slowing in inflation. However, broad-based inflation pressures remain. All major groups bar one in the CPI basket are expected to print a rise in prices."
But the economists say, should the inflation rate come in line their our forecast, they see the RBNZ delivering just a 50-point hike next month – "a move that should garner support from market traders".
They note that a lesser move than the previously indicated 75-pointer has implications for the 'terminal' cash rate.
"Currently, the terminal rate sits at 5.5% - with a 75bp hike baked in for February. A downshift to a 50bp move in February should also pull down the terminal cash rate. By the April meeting, the cash rate may peak at 5.25% or even lower at 5%.
"We believe the RBNZ has gained enough traction with their rate hikes to date, and a terminal cash rate of 5% (or lower) is all that is required to meet the RBNZ’s mandates. We continue to highlight that a move to 5.5% is likely to be a step or two too far," the economists say.
They say the focus of economists, traders as well as many business owners and households will remain on inflation.
"Inflation is the beast that needs taming. And the war on inflation is a world war. There is mounting evidence that the war on inflation may be won this year. Central banks, unwilling to take a backwards step, will continue to hike interest rates, just to be sure.
"The speed and extent of further interest rate hikes, however, is being dialled back. Global inflation rates may have peaked as goods inflation cools. Complicating the inflation prints, however, is services inflation. As we move back from consuming goods to consuming more services, inflationary pressures are shifting.
"Despite the cross-currents in the data, we’re confident inflation rates are peaking, now, and 2023 will be the year of the sharp reversal in price pressures," the economists say.
"...We see cash rates, globally, peaking in the first half of this year. And we expect central banks to start cutting interest rates by the end of the year."
In New Zealand, the economists see inflation sitting "slightly above" the top end of the RBNZ’s 1-3% target band by the end of this year.
"And early next year should see inflation back within the band and on its way to the 2% target midpoint. It’s a slow journey back, but the descent has begun."
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