RBNZ expects lower growth and unemployment but higher CPI

While the Reserve Bank's monetary policy committee left its official cash rate (OCR) unchanged at 5.5%, it has raised its forecasts from the first quarter of 2024 through to the September quarter of 2026, implying the OCR will stay at current levels for longer.

"The committee appears increasingly concerned about the near-term risk that "activity and inflation measures do not slow as much as expected," says Abhijit Surya, an economist at Capital Economics.

But Surya says that doesn't mean RBNZ will hike the OCR again.

"We think the RBNZ will be willing to tolerate a more protracted period of restrictive policy settings than was previously the case," he says.

RBNZ governor Adrian Orr told journalists the higher OCR track isn't a signal another hike is in store.

“On balance, we are in a watch, worry and wait mode,” Orr said, adding that the central bank needs to see inflation continuing to decline.

Stephen Toplis, head of research at Bank of New Zealand, says he doesn't see another hike as likely.

“In our view the wheels are starting to well and truly fall off the New Zealand economy,” Toplis says, noting that a number of recent data have “turned nastily negative.”

But at the same time, “inflation refuses to die. In fact, inflation has recently accelerated thanks to local body rates, an excise tax hike, insurance costs and rapidly rising petrol prices,” Toplis says.

RBNZ now forecasts the OCR will be at 5.6% in the March 2024 quarter, up from May's forecast of 5.5%, and by the June quarter 2025 it will be at 5.4%, up from May's 4.8%, before falling to 3.8% in the June quarter of 2026, up from May's 3.3% forecast.

By the September quarter of 2026, RBNZ expects the OCR will be at 3.4%.

The central bank expects economic growth will be slightly stronger than it was forecasting in May, the unemployment rate slightly lower and inflation will be a little higher.

For example, it expects the consumers price index (CPI) to come in at 2.1% in the September quarter, up from its previous 1.8% forecast, keeping the annual rate at 6%.

However, RBNZ still thinks the CPI will have dropped to 2%, the middle of its 1% to 3% target, by the September quarter of 2025, the same as in its May forecasts.

It expects economic growth to remain in negative territory for the rest of the year, easing 0.3% in the September quarter, more than the 0.1% contraction it forecast in May, and down 0.1% in the December quarter, before starting to grow again through 2024 and out to September 2026.

Unemployment is expected to come in at 3.8% in the current quarter, down from its May forecast of 4.1%, and will be at 4.4% in the December quarter, down from 4.6% previously.

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