There's "next to no chance" of another Official Cash Rate (OCR) hike in the foreseeable future barring any shocks to the economy, BNZ's head of research Stephen Toplis says.
His comments follow release of NZIER's latest Quarterly Survey of Business Opinion (QSBO), which showed some marked declines in labour market and capacity pressures, albeit that cost pressures remained high.
The Reserve Bank (RBNZ) has been ramping up the OCR, from just 0.25% as of October 2021 to 5.5% as it battles to get inflation back into its targeted 1%-3% range. As of the March quarter the country had an annual rate of inflation of 6.7%. The RBNZ hopes to tackle inflation by taking heat out of the economy and an incredibly overheated labour market, which has seen unemployment settle at just 3.4%.
Unexpectedly, after raising the OCR by another 25 points (to 5.5%) at its last review in May, the RBNZ indicated it saw no further rises - at least for now. The next review is on July 12. Some economists are still forecasting that the RBNZ will need to be back later in the year with another hike.
In an Economy Watch research note, Toplis said the RBNZ will be satisfied with the results of the June NZIER QSBO.
"In short it provides very strong evidence that inflationary pressures are abating and that we are heading towards maximum sustainable employment at an accelerating rate. All of this means talk of raising interest rates again should be extinguished (for now at least)," Toplis said.
He said for BNZ's economists the NZIER survey "was all about the labour market".
"And, boy, was it enlightening. Anecdotal evidence continues to mount that surging net immigration and falling domestic demand are conspiring to dramatically lower staffing pressure. Today’s report provides strong confirming evidence of this."
Toplis noted that a net 38% of survey respondees still report that skilled labour is getting harder to find but this was down on the 44% who thought likewise a quarter ago and the peak of 73% back in December 2021. "If you exclude post Covid noise, you have to go back to March 2016 to find an easier reading."
The change in difficulty finding unskilled labour was even more stark, Toplis said. This went from a net 37% finding it more difficult in the March survey to just 10% now. "Again, ex-Covid noise you have to go back to December 15 to find softer conditions.
"When the difficulty readings were last at these levels the New Zealand unemployment rate was sitting at around 5.0%," he said.
Labour as a major factor constraint also eased to 25% of businesses from 29% and a peak of 43%, he noted.
"All of the above is not to say the labour market is anywhere near weak yet. After all, a net 4% of businesses still intend to take on more staff. But what it does show is that the balance between supply and demand is returning at pace."
Toplis said as labour is a critical factor in business costs, and the effective cost inflation associated with hiring appears to be diminishing, it should therefore come as no surprise to learn that business intention to raise prices is falling. A net 48% still expect to raise prices but this is well down from the peak of 77% and last quarter’s 61%.
"This fits perfectly with our expectation that annual CPI inflation will fall to 4.5% by the end of this year. The RBNZ is picking 4.9% and will find nothing to dissuade it from its view in these data."
Another disinflationary point of note, Toplis said was NZIER’s "capacity utilisation variable".
"This collapsed to 87.1% from 94.0%. It can be a difficult variable to interpret but its fall to a level last seen in mid-1998 must surely mean something about rising spare capacity and weakening inflationary pressures."
Toplis said the latest NZIER survey "confirms our view that the economy will be going nowhere fast for some time yet".
He said the survey's indicator of domestic trading activity surprisingly fell to -17 from -8 last quarter. By itself this would tend to suggest a negative GDP reading for both the June and September quarters.
"Was this to come true it would be a more miserable outcome than we are forecasting. It is, nonetheless, consistent with our view that annual GDP growth turns negative in the September quarter. We are only just starting to see the impact of the current slowdown on the labour market. It is largely being disguised by the excess demand starting point. But we do believe the slowdown’s effects will soon become more apparent."
Toplis said this was already apparent in profitability where expectations in the survey for future profitability remain "moribund".
"Not only is this bad news for business, future employment and investment but also for the government whose finances are already under pressure from a slumping corporate tax take.
"In terms of monetary policy settings, today’s data fit very well with our view that there is next to no chance of a rate hike in the foreseeable future barring any shocks. We continue to believe the next move in interest rates will be down and that this will possibly occur sooner than the RBNZ expects."
The RBNZ is at this stage not forecasting any falls in the OCR till the second half of 2024.
NZIER principal economist Christina Leung, said the survey results suggested that "things are moving in the right direction for the Reserve Bank".
"Certainly, while inflation pressures still look to be quite elevated for now, looking ahead, firms are expecting an easing of both cost and price pressures, so that should give the Reserve Bank enough comfort that they have done enough for annual CPI inflation to move back towards its 1-3% target over the coming years.
"The Reserve Bank has indicated that it does not expect to have to increase the OCR any further and we think these results [QSBO] should provide enough comfort that things are moving in the right direction."
Additional reporting by Eric Frykberg
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