Westpac economists say we should expect the Reserve Bank to be unforgiving of any shocks that boost the growth and inflation outlook over the next year. Also, the RBNZ will likely be less willing to pre-emptively ease, as markets seem to currently expect

Westpac economists are sticking with their longstanding pick that the Reserve Bank will hike the Official Cash Rate again at its next review in February.

This is despite markets currently pricing a first fall in the OCR (currently at 5.5%) by August of 2024.

However, the RBNZ itself in its last OCR review of 2023 last week did come out with a surprisingly strong, hawkish message and did raise its OCR forecast track - giving an increased possibility of an OCR increase - but later in 2024 than Westpac is forecasting.

In Westpac's Weekly Economic Commentary, chief economist Kelly Eckhold said the RBNZ’s message and core concerns "now map more closely to our own".

"The relatively high probability of a hike in Q3 2024 indicates that all [RBNZ OCR review] meetings from now should be considered “live”," he said.

"The RBNZ seems more focused on ensuring that inflation hits the middle of the target range in the next 18 months to 2 years. Hence, given still persistent core inflation, strong population growth and an upwardly revised long-run neutral OCR (increased a further 25bp to 2.5%) the clear message is the balance of risks has shifted towards a need for further tightening.

"And certainly, there is reduced tolerance for upside surprises to inflation – which is also consistent with the new government’s objectives when the new Monetary Policy Committee Remit (and new RBNZ Act) is promulgated."

Eckhold said the RBNZ's message of last week showed that, firstly, the market is on notice that policy easings are very unlikely for the foreseeable future. Easings are going to need to be motivated by a much weaker run of data on future core inflation pressures, and housing market trends.

"Secondly, a message for the new Government is that the fiscal stance needs to be noticeably tighter than was embodied in the Pre-Election Economic and Fiscal Update (PREFU). The new Government’s fiscal plans in the forthcoming Half-Year Economic and Fiscal Update (HYEFU) need to reflect a tight stance to avert the need for a higher OCR."

Eckhold said there was still "plenty of water to flow" under the bridge ahead of the RBNZ's February 2024 OCR review "and so it’s possible a hike in the OCR comes later than February (or not at all)".

He said the Westpac economists will be watching the following key data and events:

• The Q3 GDP report on 14 December. Next week will see some key partial indicators of Q3 GDP. We currently expect modestly weaker growth than the 0.3% factored by the RBNZ. The tone of that report (and the interpretation of downward revisions to historical data already foreshadowed by Stats NZ) will be important.

• Migration data and all housing-related data. The RBNZ’s concern about the impact of migrant inflows on domestic demand, including via the housing market, which makes data on migrant inflows, housing turnover, house prices and dwelling rentals over coming months critical.

• The HYEFU. The new fiscal stance (and other policy changes) will be factored into the RBNZ’s February Statement. The updated estimated “fiscal impulse” and analysis of other new policies (investor housing) will be very important.

• The Q4 CPI report on 24 January and preceding monthly updates. Non-tradables inflation will be key. We currently forecast the Q4 outcome to be slightly below the RBNZ’s updated forecast, but the data needs to confirm a significant step-down in core inflation indicators (see chart).

• The Q4 labour market surveys on 7 February. These Labour market indicators were downplayed by the RBNZ this week and our forecasts for Q4 don’t materially differ to the RBNZ’s. But we are sure that wages and unemployment rate trends will ultimately matter.

Kiwibank economists, meanwhile, are still picking the OCR to come down in 2024 - though later than their earlier pick, which was in the first half of the year .

In their latest First View publication, Kiwibank chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say the RBNZ "came out a lot more hawkish than expected" last week.

"And it was the surge in migration that triggered the RBNZ’s sterner tone," they said.

The impact of surging migration "is double sided", they said.

"On the helpful side, the spike in available workers is dampening wage pressure. And the disinflationary force is especially strong given the tightness in the labour market to begin with. That’s the good news. The labour market is softening sooner than the RBNZ initially forecast.

"But on the other side of the same coin, more people means more demand for just about everything. And signs of an increase in demand are surfacing. Rents in particular are high above pre-covid levels and on the rise. Broader pressure within the housing market will also mean stronger house price growth. And with that, comes the wealth effect. Consumption is weak at present, but would be even weaker if not for a fast-growing population."

The Kiwibank economists said while the RBNZ’s migration forecasts were little changed between forecasting rounds – still expected to settle at about 37,000 in the next few years – "their assessment on how inflationary it will be has changed".

"Previously, the supply side impact (via slowing wage growth) was assumed to be the dominating force. But now, the RBNZ is wary of the strengthening demand impulse. Risks to the inflation outlook are weighted to the upside. Upside risks for which the RBNZ has very little tolerance.

"Not only was the peak raised, but thoughts of rate cuts were also squashed. The new track has now pushed out the first rate cut to 2025, which would mean RBNZ staying on hold for ~2 years! We disagree.

"We acknowledge that the risk over the next 6-9 months is tilted toward further tightening. But we still believe the RBNZ will be in a position to normalise policy next year. Rate cuts could well be a 2024 story. Just later in 2024. We now pencil in the first rate cut in November next year. But we’ll park this debate for later. For now, to hike or not to hike – that is the question."

Westpac's Echold said in respect to the forthcoming changes to the RBNZ’s Remit and Act to focus the RBNZ solely on inflation control, he doesn’t think that these adjustments will do much for the conduct of policy in most circumstances.

"Perhaps an exception would be the case of supply shocks which might temporarily boost inflation," he said.

"However, in the current context we think these adjustments will affect the RBNZ’s assessment of the balance of risks for policy in the next year or so.

"The government is sending the RBNZ a clear message that inflation needs to be its highest priority and there is no room to be taking chances that might cause inflation to remain well above 2% in mid-2025.

"Hence, we think the upshot is that we should expect the RBNZ to be unforgiving of any shocks that boost the growth and inflation outlook over the next year. Also, the RBNZ will likely be less willing to pre-emptively ease, as markets seem to currently expect. A pre-emptive easing that turned out to be the wrong judgement would not be greeted warmly by the Minister given the new Remit."