OCR could reach 4.25% - ASB

ASB economists have broken with tradition and forecast a peak Official Cash Rate (OCR) of 4.25% next year.

This is higher than the 4% level favoured by many of their rivals.

ASB's chief economist Nick Tuffley follows many colleagues in forecasting two more 50 point rises this year but “pencils in” a 25 point rise next February.

This follows a 1.7% rise in GDP revealed by Stats NZ, which has sent economists fretting about an economy that is too strong for inflation to be easily contained.

“Second quarter GDP was stronger than our expectations, with signs that momentum in the second half of 2022 will be also stronger than we have been anticipating,” Tuffley said.

“This adds up to the risk that inflation pressures will be even more persistent.”

ASB had forecast far lower growth: 1.2%.

Westpac's prediction had been closer to the actual result: 1.6%.

But its acting chief economist Michael Gordon notes that it was close to the RBNZ's own forecast of 1.8%, and so “has no obvious implications for the interest rate outlook.

“But at the heart of the issue is an economy running above its non-inflationary capacity. Higher interest rates will work to close that gap over time”

Gordon retained his forecast of an ultimate peak of 4% for the OCR, which he said would strike the right balance.

“Doing too little means that inflation could become stubbornly persistent, doing too much could mean an unnecessary period of weak activity and high unemployment,”

Kiwibank's chief economist Jarrod Kerr is also sticking with a 4% peak for the OCR.

Although his team had been predicting a lower rate of economic growth – 1.1%, the higher figure was still not enough to change the overall outlook for the RBNZ's determinations.

The problem was elsewhere.

“The concerning part of the report was household spending,” Kerr wrote.

“Overall household spending declined by 3.2%, driven by lower spending on goods such as used motor vehicles and audio-visual equipment.

"The outlook is awkward.”

Gordon also saw problems in important sections of the economy, even if the statistics drew an overall happy picture.

“Even with the strong result, it is important to note that there are some parts of the economy that were in decline,” he wrote.

“Retail sales were down, mining shrank by another 8%, non-food manufacturing excluding petroleum fell by 1.3% and construction saw a surprising 2.4% fall.”

Despite their differences regarding the OCR endpoint, the three economists are united on one thing.

They think the RBNZ will have to move hard on interest rates to fight inflation but will not enjoy doing so.

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