Kiwibank economists are strongly disagreeing with market sentiment suggesting that further Official Cash Rate hikes from the Reserve Bank may be in the pipeline.
Economists at the country's largest bank ANZ caused a considerable stir at the end of last week by changing their call and forecasting that the RBNZ would start hiking the OCR, currently paused at 5.5%, again at its review on February 28. The ANZ economists now pick a peak OCR of 6%.
Following on from this forecast there was a flurry of activity in the wholesale interest rate markets, with the result that the market is now pricing in a 50-50 chance of an OCR hike in the February review.
In Kiwibank's latest First View publication, chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say they "disagree" with the wholesale market pricing.
"We think the RBNZ has done more than enough to get inflation back to [its target of] 2% and continue to call 5.50% as the peak in the OCR," the economists say.
"The RBNZ has cried wolf on inflation, and we’re wary policymakers may feel it’s time to hike, again. But we don’t think it is warranted. The [economic] data has softened enough, and our Kiwibank transactional data shows the financial strains faced by many households."
The Kiwibank economists say "as always", they’ve been closely watching the Kiwi data unfold and last week’s employment report was "no exception".
They say the data for the December quarter showed that the labour market continues to soften - "just not as much as we had thought".
"The unemployment rate lifted from 3.9% to 4.0%. It breaks 9-straight quarters below 4% (just) and marks the highest rate since early 2021. But it was still less than we, and the RBNZ, had expected (Kiwibank 4.2%, consensus 4.3%). Our forecast lift in unemployment is taking longer to come through. The uptick in the underutilisation rate to 10.7%, is the highest since March 2021 and proof of what’s to come. More people need more hours. But employers are not as keen."
The economists say similar themes to the last couple of quarters are in play. That is, the loosening in labour market conditions continues to be a story of a migration driven recovery in labour supply.
"But cracks are emerging. There is a very strong migration impact. In fact, the working age population rose by 3% - the strongest ever recorded (back to 1986). But with job growth of just 2.4%, employment can’t keep up. The surge in supply of workers, above firms’ demand, should see unemployment lift further. The participation rate remains near the record high (71.9%). And then, there’s our slowing economy. Firms are no longer hiring with the same gusto as demand wanes under the weight of high interest rates. There’s more pain to come."
Wage inflation continued to soften, the economists said. The private labour cost index – a measure of pure wage inflation – lifted 1% over the quarter. Meanwhile, annual wage inflation cooled to 3.9% from 4.3%, further away from the 4.5% peak. Still though, wage pressures remain firm.
"There are clear signs that the RBNZ’s heavy handed hikes are inhibiting household demand, and hurting business.
"The labour market typically lags the broader economic cycle as employers hold onto employees for as long as they can, before downsizing. But unemployment should soon react to already slowing activity. And as inflation continues to decelerate, unemployment will continue to tick up. It’s the Phillips curve in action. We continue to forecast the unemployment rate breaching 5% later this year. The December quarter snapshot may be the last hurrah for labour market," they say.
In Westpac's Weekly Economic Commentary senior economist Michael Gordon says last week's labour market figures on their own are unlikely to spur the RBNZ to a fresh round of interest rate hikes – "and they will need to be balanced against softer-than- expected GDP and inflation outturns since the November Monetary Policy Statement".
"We think this data vindicates the stance we have had for a while that the OCR will remain unchanged in 2024.
"It’s plausible, though, that the RBNZ continues to express its previous concern that an interest rate increase could come in the next six months if core inflation pressures don’t adequately recede. The 28 February Statement would be an ideal platform to lay out the case for that move," Gordon said.
ASB chief economist Nick Tuffley in ASB's Economic Weekly said in relation to talk of further OCR hikes that he doesn't think the RBNZ will need to "go to those lengths". Notwithstanding recent economic surprises, he says he still expects inflation will fall back below 3% - and therefore into the RBNZ's 1% to 3% target band - by the September quarter of this year (with the result published in mid-October).
"There is already sizable restraint in place," Tuffley said.
"Demand is going sideways even with record inbound migration, with per- capita GDP already down 3%. It’s only the home rental market showing any signs of migration-linked inflation pressure. Meanwhile, labour supply is expanding and set to send unemployment to 5% by year-end – moderating wage growth in the future.
Key influences on inflation are, therefore, heading in the right direction – the question is are they going to move quick enough?
"For the RBNZ, OCR cuts will be driven by when it gains enough confidence that inflation will get into the target band and stay there. It needs to be at that point in time when the risk of regret of leaving monetary conditions too tight for too long starts to outweigh the risks from easing too soon.
"The risks have definitely skewed to that point in time being later than our August forecast for OCR cuts, which we are retaining. But we are also mindful that we are at a turning point in the economic data, which makes things hard to read and easy to flip-flop on OCR forecasts. We will continue to watch events closely, but still judge that inflation and other data should give the RBNZ confidence to cut around August – November," Tuffley says.
BNZ head of research Stephen Toplis says in BNZ's latest Markets Outlook publication that while he believes the recent data flow might convince the RBNZ to maintain its tightening stance "we don’t think it justifies further tightening".
"In short, inflationary pressures may not be diminishing as rapidly as the Bank [RBNZ] would like but directionally everything is going to plan: the economy is going backwards, the labour market is easing, core and headline inflation are falling and there is a bucket-load of tightening that hasn’t yet fully impacted the economy.
"Nonetheless, the RBNZ has been doing its very best to suggest it is VERY nervous about what it sees as persistent inflation. It has downplayed weaker than expected growth and inflation and focussed on the components of the data releases that suggest upside pressure. And the Chief Economist delivered extremely hawkish responses to questions post his recent speech," Toplis said.
He said in the current environment, market pricing of an OCR hike "might just matter".
"If the RBNZ is sitting on the fence, in a do we or don’t we state, then if the market is pricing in a tightening the Bank is much more likely to pull the trigger. We’ll be keeping a very close eye on this as we get closer to the decision day [February 28]."
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