A break in OCR increases forecast

The OCR is at a 14 year high moving from 0.25% to 5.50% in just two years. Most of the 25 economists surveyed by Reuters expect it to remain on a flat line into next year.

However, there are dissenters. Westpac expects a 25 basis point rise in August and ANZ has a placeholder 25 basis point hike pencilled in for November.

RBNZ OCR hikes ended in May and pushed the country into a technical recession, although some economists believe we may have come out of it briefly and will tip back in again near the end of the year. 

ASB chief economist Nick Tuffley says recent events have slightly reinforced the RBNZ’s on-hold position.

“The first quarter GDP was a touch weaker than the RBNZ had anticipated; cost and pricing measures in business surveys continue to ease, though glacially in some cases; migration flows may already be peaking on a month-by-month basis, in line with the RBNZ’s, and our, assumption that the existing surge is a temporary post-lockdown catch-up rather than the start of a sustained boom, rapidly- easing labour constraints suggest.”

ASB economists believe the RBNZ has done enough, with further lagged impacts on home-borrowers set to flow through over the rest of this year. “We continue to expect the RBNZ will start cutting the OCR about May next year. This is earlier than the RBNZ’s forecasts.”

But the RBNZ, he says, will remain wary. The lesson it has learned, and other central banks are still learning, is that inflation can remain surprisingly stubborn – even if it has peaked. “Market pricing, with some chance of a further hike and no cuts until mid-2024, looks fair.”

Data the key

Data flow since May will likely have comforted the RBNZ that its on-hold stance is appropriate – at least for now, Kelly Eckhold, Westpac’s chief economist says.  

From the RBNZ’s perspective, the economy started the year in a slightly less overheated position than might have been feared when it produced its May Monetary Policy Statement, he says. 

Many indicators of domestic demand seem consistent with a cooling economy. “For example, the retail and construction sectors seem to be evolving as expected given the interest rate rises. The corporate tax take is also weakening.”

On the other side of the ledger, some domestic indicators are consistent with lingering economic resilience, he says. In particular, the labour market has not cracked yet – while migration has surged, jobs growth is still outstripping increases in the population. The housing market has also found a bottom probably somewhat sooner than the RBNZ had factored in.

It’s likely the RBNZ’s commentary this week will be brief, says Eckhold.

“Saying too much raises the risk of misinterpretation and might lead markets to price in rate cuts or increases that the RBNZ won’t want to endorse right now.

“The main message we might expect to see is that the future direction of interest rates is data-dependent, to leave room for the RBNZ to shift tack should upside – or downside – risks to the inflation profile accumulate. 

On track

ANZ expects the economy to enter a “proper” demand-driven recession in the second half of this year.

Recent data point to slightly more resilient demand. The banks’ consumer and business surveys have continued to recover, while house prices appear to be on the cusp of lifting.

Chief economist Sharon Zollner, says the bank expects the economy to remain ‘on track’ over coming months, as lower oil prices and shipping costs, the easing of cyclone impacts, and a significantly less-tight labour market see headline inflation reduce, though not without bumps: the end of the fuel tax subsidy will work in the other direction.

“While the economy is certainly slowing markedly as tighter monetary policy bites, overall demand will be supported by the migration surge, the housing market lifting itself off the floor and fiscal stimulus,” she says. 

These factors are unlikely, Zollner says, to outweigh the impact of higher interest rates. The bank is forecasting a mild recession, with GDP falling 0.3% in the second half of the year accompanied by rising unemployment.

New growth

Kiwibank chief economist Jarrod Kerr says rising net migration boosts the supply and demand side of the economy. More people means more demand for goods and services and greater production to prop up aggregate output.

The June quarter may see a bounce back in economic growth, he says.  However, a recession later this year is still Kiwibank’s base case.

“But because of the migration-led boost to population, we have shaved a few % pts off our last estimate. We now see a three-quarter, cumulative 0.4% contraction in economic activity beginning from the second half of the year.

“It’s not until late in 2024 that economic growth resumes its long-average pace. No matter how you slice and dice the data, the rapid rise in interest rates is dragging down demand (too well).”