Westpac economists have now joined those at ANZ in expecting that the Reserve Bank (RBNZ) will hike the Official Cash Rate (OCR) again in November - which would take it to 5.75%.
Economists at the other major banks think that the RBNZ has now finished with rate hikes and that the OCR will be left on its current level of 5.5% for an extended period of time.
The RBNZ itself indicated through its forecasts at the May OCR review that it was not expecting to make any further rate hikes in this cycle.
However, the Westpac economists had previously forecast another rate hike next week (August 16) at the RBNZ's next review.
"We continue to see the RBNZ raising the cash rate to 5.75%, but now expect that to occur in November instead of August," chief economist Kelly Eckhold said in Westpac's Weekly Economic Commentary.
"While recent data have highlighted the lingering strength in domestic inflation pressures, at this stage we doubt this will be enough to overcome the RBNZ’s strong bias to keep the OCR at 5.50%. Nevertheless, we think resilience in economic conditions and sticky inflation will eventually force the RBNZ to act."
He said since May of this year the Westpac economists have had the view that the RBNZ would need to tighten policy further to ensure a timely fall of inflation to within the 1-3% target range. This view was predicated on a sense that current very high rates of inflation would be slow to recede and that risks to the longer-term outlook were tilted towards a very protracted easing in inflation pressures. Strong net migration was seen as supporting both the housing market and the economy right at the time the RBNZ would have hoped that growth would be quickly slowing and providing much needed disinflationary impetus.
"In large part, the accumulated evidence has supported our view," Eckhold said.
"However, while we are seeing strong and potentially concerning data, that probably won’t be sufficient to budge the RBNZ’s Monetary Policy Committee in August. The RBNZ has previously signalled its very strong bias to keep the OCR steady at 5.5% until the second half of next year, and that’s a high hurdle to clear. So on this one we must play the man (the MPC) as opposed to the ball.
"We retain confidence that recent trends will continue: the economy will likely continue to be supported by ongoing strong migration, the housing market will continue to strengthen, and inflation will only ease gradually at current interest rates. In addition, we continue to doubt the economy will experience an outright recession in the second half of 2023 as forecast by the RBNZ (although risks from the concerning situation in China and weaker agricultural commodity prices warrant keeping a close eye on that element of the forecast).
"Against this backdrop, underlying inflation pressures will likely prove stickier than the RBNZ is expecting. While headline inflation is set to continue easing as earlier supply disruptions drop out of the annual calculations, we don’t expect a return within the target band until late next year. And a return to the 2% target mid-point will likely take significantly longer.
"Given those conditions, the interest rate reductions we had previously expected to occur in the second half of 2024 will likely now occur more slowly, consistent with the RBNZ only easing cautiously as inflation gradually eases. We suspect many other central banks will be taking a similarly cautious approach."
In their Weekly Data Wrap, ANZ economists said they believe that ultimately NZ's labour demand will slow; "it cannot remain immune to slowing momentum in the economy indefinitely".
"Weak labour demand combined with persistent strength in labour supply (reflecting current high levels of net migration) is expected to see the unemployment rate lift sharply, peaking at 5.2% in 2025," they said.
"What matters for the RBNZ is pace of that increase, and therefore guiding the labour market out of inflationary territory. The longer the labour market remains beyond sustainable levels, the more oxygen is given to inflation through persistent labour cost inflation finding its way into consumer prices. We don’t expect that the labour market will transition to an outright disinflationary state until Q1 2024, meaning more persistent domestic-driven inflation and more work for the RBNZ to do.
"As capacity pressures in the labour market unwind, wage growth should moderate. Q2 marked the start of the descent from the peak, but given conditions remain inflationary, wage growth will take some time to return to levels consistent with inflation at target, and are a key driver of our forecast of persistent domestic-driven inflation.
"There are plenty of risks to the outlook, which we will set out in our forthcoming Quarterly Economic Outlook, but we continue to expect the RBNZ will hike again. A relatively more resilient labour market, culminating in more persistent inflation pressures, is central to that view."
39 Comments
Adrian Orr told us some years back that he'd rather fight Inflation than Deflation. In other words, he was saying "If I'm wrong, what's the easiest way to correct my mistake?". And that looked easy when the obvious course of action was to drop interest rates back then. Who was going to complain about that, after all?
Today he's got his wish; he's fighting the least-worst option, as he saw it back then. But it's not as easy, is it, Adrian? Raising rates at any time. But funnily, enough his thinking was right back then, even if he was wrong in practice, and should still apply today.
He should be ramping the OCR up, as he should have been at a faster rate for the last 2 years (and maybe we'd have squashed the problem with an OCR of 3.5%? Too late for that now). If he's wrong and ramps the OCR to (pick a number - 7%) then it's dead-easy to drop them. But is he sticks at the suggested 5.75%, and he's again wrong, the catchup is going to be more than painful for the economy.
You raise rates when you can, not when you have to.
when deflation happens, do middle-income earners or low-income earners get anything?
when inflation happens, middle-income and low-income pay the whole OCR being raised through rent and interest rates which in reality is actually a seizure. and the money ends in central bank and later when it is surplus it reached the govt or will be lended to another borrower. and they call it no profit organisation.
Money of physical hardwork is stolen suddenly in the name of some inflation which is not really the mistake of those who worked to make that.
how is this seizure different from the landlords of the past centuries, the only change is kingdom got replaced by some so-called people where positions many of the time is again seized by the same lords in the name of experience running businesses
never the inflations will reduce the low income earning jobs , and raising wage is not the answer to remove the poverty, because it will just make production more expensive which will again put on top of what is being produced or sold.
Wow! A solution for a problem that doesn't exist! Nor is ever likely too.
Doubt me? Then by all means point me at a period where deflation has ever been a real problem. I can wait.
Or would you like to talk about other hypothetical situations? Like travelling at the speed of light? Or what happens to matter at absolute zero?
(Staggering that you got 36 thumbs up for that comment. Truly staggering!)
Looking at the massive costs ahead for users and/or taxpayers to bear in order to keep our infrastructure from crumbling under the weight of high population growth, I think a lot more pain is still to come.
We wasted all those years borrowing hundreds of billions to prop up house prices with nothing real to show for. I don't blame the system though - no reason to work for an income when your houses can do it for you, eh?
Even the government borrowed on the cheap to dish out benefits to "80% of NZ's population" at the peak of level 4 lockdown, a figure Robbo is especially proud of.
Oh, Well, did you make this s#%% up ???
by HouseMouse | 15th Nov 22, 11:01am
As I have said before I think house prices will stop falling in late 2023. They will then only very slowly start inching up though 2024-2025.
If I was a prospective FHB I would be looking to buy around July /August 2023.
HouseMouse was a bit snarky towards The Prophet the other day. To be fair he has been rather good in general.
All can be forgiven, but some need a little training in Humility. Chebbo is a good trainer.
by chebbo | 30th Dec 22, 12:22pm
I predict that HouseMouse will turn up to make several thousand predictions, and then spend the rest of the year publicly self-fellating over the 3 he happened to get right.
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The next set of inflation figures will surprise everyone by refusing to go down, I suspect. Nothing I see in the real world suggests inflation has eased.
Unlikely to see a rate change before the election though, unspoken rules of the game. Whoever wins will have to cop the public ire when the RBNZ is forced to raise in November.
Inflation is very unlikely to get back to the range of 1 - 3%, but that doesn't mean interest rates will keep rising. The economy is only starting to deteriorate now, including in the US, and by November, this will be much more evident. In November, it will be clear that central banks can no longer afford to raise interest rates for fear of killing the economy, and that they will have to accept a medium-term of 3 - 4% inflation rate.
"Inflation is very unlikely to get back to the range of 1 - 3%"
Really? Any chance you could provide your reasoning?
"In November, it will be clear that central banks can no longer afford to raise interest rates for fear of killing the economy, ...."
Agreed. I think we can agree that the OCR is blunt weapon that does as much harm as good. (IMO it so blunt that more harm is done than good when compared to other inflation fighting tools. Further, and this is critical, a prolonged high OCR setting will embed inflation. Yes. Inflation will be embedded by a high OCR for a long period. Think about it. It must.)
" ... and that they will have to accept a medium-term of 3 - 4% inflation rate."
Only if the RBNZ continues with a high OCR and our politicians do not pull they inflation fighting leavers they have at their disposal.
Jacinda and Orr created this mess between them, she had the sense to leave when all hope was lost.
* Too much cheap money
* Too much govt debt and spending and give away
* Shutting down NZ and cutting back productive capacity to make stuff
* Stopping workers coming here to make stuff
* Increasing compliance and regulatory costs on business through endless red tape and health and safety and green / labour BS
They have created the perfect inflationary storm which is why NZ inflation is running 2 to 3 percent higher than it needed to be.
Perfect socialist communist policy setting.
The chickens are now coming home to roost with huge fiscal holes and caverns opening up around their feet.
Inflation will be higher than many expect. Macro events like climate change, geopolitics wars, and deglobalization east vs west means new costs with no productivity gains. These increase supply costs. Therefore interest rates need to be high to keep inflation in check. Look at all the money sloshing around….. I’m predicting 5.75% by end of year. Don’t know about next year but I think there are more upside risks than downside.
If we leave inflation unchecked there would be riots as the middle lower class cannot afford the basics, just look at the crime. Govt cannot keep increasing minimum wage and keep high infrastructure spending
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