The RBNZ is expected to stay on script that the rate cycle has peaked, although Westpac and ANZ believe there will be another OCR hike in November because inflation will remain high.
The review will include a RBNZ Monetary Policy Statement (MPS), the first since May when it indicated hiking was over.
The MPS will give the bank’s view on economic developments, growth and inflation forecasts.
Good news might be bad news disguised for the RBNZ, says Sharon Zollner, ANZ chief economist.
Resilient consumer spending, business activity, hiring, and house sales could amount to greater risk and the RBNZ will have to raise the OCR until something breaks properly.
“Perhaps not. It could be that all that resilience is about to give way; that things are indeed running out of steam just as the Reserve Bank requires in order to bring inflation down.
“The fall in inflation thus far is concentrated in goods and actually has little to do with the RBNZ’s tightening as yet.
“That’s not to say monetary policy isn’t working. The pressure on retail sales is clear; house prices fell almost 17% from their peak. And we are forecasting a mild recession and rising unemployment.”
But even with the RBNZ paused it’s in a race: the impacts of its tightening versus potential creep in the neutral OCR while inflation stays high, says Zollner.
“What’s a ‘good’ mortgage rate? What’s a ‘good’ pay increase? If these perceptions are creeping higher, that will chip away at the impact of the tightening that’s been delivered. If the RBNZ tightens too little initially, there is a cost: having to tighten more later.”
The ANZ predicts a 25bp hike in November to 5.75%. But that will still be lower than the 8.25% it took to quash inflation in 2008.
Zollner says the lagged impacts of tighter monetary policy continue to feed through to spending and investment. “Exports struggle in a tough global environment. The labour market continues to weaken and unemployment rises. Strong population growth flatters GDP, but per capita growth is very weak.
“So why would the RBNZ hike again with all that going on? Because it has an inflation target, not a growth target.”
Rise in short term inflation forecasts
The BNZ says the cash rate of 5.5% will remain unchanged until late next year.
“One could argue the lower than anticipated second quarter CPI of 6% versus the RBNZ’s pick of 6.1% adds further weight to the RBNZ’s ‘success story’ but we are loathe to draw this conclusion as non-tradables inflation remains stubbornly high, says Craig Ebert, BNZ chief economist.
BNZ believes the RBNZ will need to raise its short term inflation forecasts, conceivably, by a significant margin. It is forecasting a 2.4% increase in the September quarter CPI compared to an RBNZ May estimate of 1.8%.
“A decent chunk of the deviation can be attributed to the recent surge in petrol prices over and above that the removal of government fuel subsidies,” Ebert says.
“The RBNZ will be fully justified in looking through this. In contrast, the remaining differential, largely driven by persistent non-tradables inflation, will provide some cause for concern.
“For now, we think the RBNZ will have to acknowledge this concern but report that its medium-term view that annual CPI inflation is back within the target band by mid-2024 still holds.”
Forecast changes
Westpac chief economist Kelly Eckhold predicts the MPS will be “steady as she goes” but that is not to say there won’t be changes to its forecasts.
Key factors pushing down inflation pressures in its forecasts, says Eckhold, will be a weaker March quarter GDP, a still resilient labour market and strong domestic price pressures.
“There shouldn’t be much change in the OCR track until September quarter next year. However, what has changed is the spread of risk distribution, with upside and downside risks becoming more pronounced since the May MPS.
“On the downside the focus will be on weakness in China and commodities markets and the potential for an earlier move to lower inflation and a deeper recession.
“On the upside, greater persistence in domestic inflation, stronger house prices, and a slower adjustment in the labour market will put a November OCR rise firmly on the table,” Eckhold says.
Wary of risks
ASB’s chief economist Nick Tuffley says the RBNZ will be wary of prematurely declaring victory against inflation which it isn’t forecasting to drop below 3% for more than a year.
“What matters is whether the run of news continues to support the RBNZ’s outlook for inflation to be back in the target band in 2024,” he says.
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