“Assuming no abrupt developments such as a sharp re-pricing of risk globally (which we consider a very real risk, albeit an unforecastable one), we now believe the RBNZ will need to keep on hiking right on through our previous forecast of 2%,” said chief economist Sharon Zollner.
The official cash rate (OCR) is currently at 0.75%. The next cash rate review is on Feb 23, when the Reserve Bank of New Zealand (RBNZ) will publish a full monetary policy statement with forecasts.
“We now see a peak in the OCR of 3%, with the RBNZ raising in steady 25bps steps to get there,” she said.
According to Zollner, next week’s fourth-quarter inflation print could be closer to 6% or higher than the 5.5% that she had been expecting.
“Inflation will probably rise yet further in coming quarters, with global and domestic drivers taking longer to rein in than anticipated.”
Not only that but “it’s become increasingly clear that the current labour market is not consistent with low and stable inflation and things will only intensify from here”.
A surge in hiring in November points to a roughly 3% unemployment rate in the fourth quarter and “if that happened, an unemployment rate with a 2-handle could be imminent”, she said.
She underscored, however, “it is important to note that we are not forecasting more OCR hikes because we think the NZ economy has a lot more upside growth surprises left in it. On the contrary, we expect growth to be fairly insipid”.
Anecdotally, the housing market has come to a sudden stop, due to a policy shock to credit availability and sharply higher mortgage rates, she said.
Higher mortgage rates will directly reduce discretionary spending and supply-side constraints, not least labour shortages, which are not growth-friendly.
Finally, omicron is on our doorstep, she said.
Despite all that “the reality of a prolonged negative supply-side shock is that even modest growth can stretch resources and cause inflation".
"The trade-offs are unpleasant and there’s no way around that,” she said.