RBNZ cries wolf – Kiwibank

Economists will be keeping their eyes on today’s release of the RBNZ’s survey of inflation expectations as financial markets price in an OCR rise either this month or April.

The survey asks business leaders and forecasters where inflation is headed and the RBNZ puts a lot of emphasis on inflation expectations as a guide to price setting behaviour.

Kiwibank chief economist Jarrod Kerr, who disagrees with calls the RBNZ will raise the OCR, says history shows that expectations of inflation follow actual inflation and can be self-reinforcing.

“The good news is actual inflation has fallen from a peak of 7.3% to 4.7%, with broad consensus it will continue to fall into next year. Surveyed expectations should also fall. Expectations of where inflation is likely to print over two years should fall closer to 2.5%, currently 2.76%, and down from a recent high of 3.62%. Still a way from the 2% target midpoint of the RBNZ. But a move in the right direction.”

The pricing in of another OCR rise came after the ANZ’s recent call that the RBNZ would lift the OCR by 25bps this month and again in April, bringing it to 6%. “We just don’t think the RBNZ committee will feel confident it has done enough to meet its inflation mandate”, ANZ economists said.

Although there has been a continual slowdown in the labour market, and an easing in inflation, underlying strengths within the data has seen a shift in market pricing ahead for RBNZ cuts and now hikes. The market has moved from pricing no rate hikes, to now pricing in +14bp into February and +23bp into April.  Essentially indicating an expectation of a 50/50 chance of a rate hike at the end of this month.

Kerr disagrees. He says the RBNZ has done more than enough to get inflation back to 2% and the OCR will remain at 5.5%.

“What we think the RBNZ should do; pause and cut, may be against the grain.” However, he says, there is the risk of another hike, regardless of how much that goes against the softening in the data.

While the RBNZ has reiterated its OCR hiking intentions and focused on the upside risks to domestic inflation while watering down the downside risks, Kerr says the central bank has cried wolf.

“We’re wary that policymakers may feel it’s time to hike again, but we don’t think it is warranted. The data has softened enough, and our Kiwibank transactional data shows the financial strains faced by many households. There are clear signs the RBNZ’s heavy handed hikes are inhibiting household demand and hurting business.”

BNZ research head Stephen Toplis says fear the RBNZ might resume its tightening cycle has well and truly taken hold. “It was only a matter of days ago that four rate cuts were priced in before the end of this calendar year.”
However, he says the BNZ hasn’t yet seen enough to push it over the line into making an OCR rise its central scenario.

“We are wary of adjusting our calls with gay abandon. A year ago we were forecasting the easing cycle would begin in mid-2024. We’ve made a few minor tweaks to the exact size and timing of the cycle but nothing of substance. We do feel the pressure to do so now more than we have for some time but we still feel further tightenings are not justified.”

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