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]."
36 Comments
How can it be market manipulation? Their rate call came out AFTER the global money market had already begun raising NZ swap rates and bond yields. All they are doing is now running to get on the right side of the market call. They are following the market, not creating it.
I think there was probably a bit of that to be fair. I thought the timing after Westpac dropped their mortgage rate a touch looked a little suss, and ANZ will definitely have their money on higher for longer (and they are big enough to directly influence the markets and RBNZ).
guessing the OCR in the past few months could be done very easily as it never changed.
Are they actually heavy handed for you only have to look at when the OCR became a RB tool and compare it against the CPI. The CPI wasn't as high as it is now and the OCR was as high if not higher and it remained so until the credit crunch.
History is s great teaching tool.
Just because a KB commentator says the increases are heavy handed doesn't make it so as that is an opinion.
The goal is to get inflation to 1-3 % and it isn't there yet.
If the Govt spend less, then insurance premiums will stop going up, local Govt rate increases will moderate, landlords will ignore demand / rising costs and rent out their properties at a discount? Really?
Now what's the area of Govt spending that is going up the fastest? Yes, interest paid out to banks on their reserve balances at RBNZ (interest is paid at OCR) and welfare / benefits (thanks to the economic slowdown)!
They are using data heavily influenced from over a year ago inflation, to decide what is happening right now in the economy.
Its like me averaging my bank balance over the last year to decide how much I should spend right now, instead of taking whats in my bank account right now.
The way RBNZ makes decisions about the OCR is wrong. As is the way Stats calculates and reports it and the way Stats collects and reports unemployment (which is something like, if you have worked in the last 6 months, you aren't considered unemployed). We need far more up-to-date reporting and the RBNZ to respond far quicker than it is. Economies now move a lot faster than they did in the 1980s and we need to improve our response times as a result. RBNZ, if they tighten or leave as is, are setting us up for a depression, along with the non counter-cyclical fiscal policies of the current lot. RBNZ acted too late going up and are now going to act too late going down, a forced exaggeration of the economic cycles.
re ... "I'm not sure that inflation can be talked down."
In economies more advanced and sophisticated than ours it does.
Businesses in the US pour over the Fed's utterances in great detail and CEOs/CFOs issue notes on what the Fed is doing and/or is likely to do. Even in the UK - where they too like to keep mystery around what senior officers do - they too issue notes to senior execs.
Ever seen one of those in NZ? No? I thought not.
The numbers are all that matters. If domestic wage growth is softening and other inflation indicators look good then RBNZ wont raise.
I am seeing and hearing the opposite. I suspect it depends on your location, markets and who you talk to.
Time and numbers will be interesting.
'Heavy handed' is a better way to describe the Reserve Bank of New Zealand's (RBNZ) decision to lower the Official Cash Rate (OCR) from 1.75% to 0.25% for over a year while the NZ money supply experienced unprecedented expansion. This all on the backdrop of unusual global trends where interest rates have been artificially suppressed since the 2008 financial crisis. Inflation was bound to break out at some point. The RBNZ's cautious stance (add in ongoing US economic strength and war) appears sensible and more like a gradual return to normative monetary policy than undue restraint.
There are clear signs that the RBNZ’s heavy handed hikes are inhibiting household demand, and hurting business.
Well, to be an old curmudgeon, when h'holds are incentivized to live paycheck to paycheck (as they are across the English-speaking world), behaviors became ingrained and the wider economy adjusts to consumer demand and how businesses expect consumers and h'holds to behave.
I have no doubt that businesses focused on 'nice to have' products and services will be suffering - sales of craft beer, coconut yoghurt, artisan foods will be down. But if the wider Western world is any indicator, we are seeing stresses in companies like Unilever and P&G whose expectations have less than actual outcomes.
If the only answer is to lower the debt burden so that people don't have to change or adapt their behaviors, it's the same old story playing out.
I'm not sure why ANZ changed their tune when unemployment data slightly undershot what they were predicting. It is heading in the "right" direction and it likely to keep heading that way, especially the public sector pay/employment based on what the govt has suggested.
The Kiwibank economics group have consistently been doves during the current inflation and have failed to predict the OCR increases. I hope that Kiwibank was not positioned on that basis. The current Government consistently criticised the RBNZ for not getting inflation back to target quicker. Parliament has deleted maximum sustainable employment as an objective. It should not be a surprise if the Monetary Policy Committee moved to a more hawkish approach now.
If the OCR goes up any further for any decent length of time, I suspect a decent proportion of people will be pushed beyond breaking and end up selling. I know owner occupiers and investors who would be in this position. Friends of ours have already had to push our their mortgage term to its max and cut kiwisaver contributions to pay their mortgage at new rates. We also have friends who will be forced to sell properties they picked up in the last few years at a loss. Meanwhile the government will likely have to either cut services to the bone or borrow to fund backdated interest expense claims for property investors, followed by a few extra dollars for the rest of us via tax cuts. I'm sure they'd do anything else possible to avoid borrowing for these cuts.
from a purely selfish viewpoint-no debt and a number of TDs-why just one rate rise, let's have several.
However, taking a slightly wider point of view, I think it's a terrible idea. Once again Orr, like WW1 generals, would be fighting the last war. The economy is slowing and even the RB will catch up with that in time.
My plan-Jfoe for Governor.
There's an ANZ bank ad where a guy is measuring his mortgage against the door and says it's "nearly out the door". He holds up his cell phone to show the app. It used to say 34k (or thereabouts). I just noticed they have changed that shot and it now says 147k! Now that's inflation.
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