ASB economists rue the whiplash derived from last week's big 'dovish' shift by the Reserve Bank, while Westpac economists still see a further Official Cash Rate hike in August and ANZ economists expect one in November

Financial market participants and economists are going to be spending time with chiropractors "after another case of whiplash" following the Reserve Bank's signalling that it has now done enough interest rate hikes to control inflation, ASB chief economist Nick Tuffley says.

The RBNZ lifted the Official Cash Rate to 5.5% last week from 5.25% but contrary to market expectations indicated that it saw the OCR now remaining on hold at 5.5% till the second half of next year. 

But while some economists are going with the RBNZ's signal that this is now 'enough' of the rate hikes - others don't think enough will be enough.

Westpac economists, who before the OCR announcement last week had forecast a peak OCR of 6% still reckon the RBNZ will have to hike again. They now see another, final, 25 basis points move in August, which would take the OCR to 5.75%.

Senior economist Satish Ranchhod said in the bank's Weekly Economic Commentary that "we think that the cash rate will need to rise further from here, especially given the boost to demand from the current surge in migration".

"...It’s likely that domestic demand and inflation pressures will prove stronger than the RBNZ expects. However, it will take some time – likely not until late this year – before the strength of those pressures becomes obvious," Ranchhod said.

"The key area to watch will be the housing market. The RBNZ is forecasting a further 3.5% fall in house prices over the next year before they bottom out. However, the most recent REINZ sales figures hint that the turn in the market may have already arrived. The upturn in house prices in Australia – which has seen a similar resurgence in net migration – should serve as a warning for what might come next here."

ANZ economists in their Weekly Data Wrap also still think there will be another 25 basis-point move to the OCR this year, but not till November.

They note that the RBNZ has tripled its assumption for annual net migration (working age) for 2023 to 75,200.

"While that’s likely to ease constraints in the labour market and put downward pressure on wages, we are wary of the impacts on general demand and house prices and rents in particular, just as the housing market is showing signs of life. With the housing market being a key channel for monetary policy, the RBNZ are unlikely to tolerate a pickup in house prices if they estimate that it will boost spending via the wealth effect," the ANZ economists say.

"...We still think further hikes are on the table, but it’s a high hurdle for the RBNZ to recommence tightening having called a pause now. Looking at the key incoming data before the next few meetings, we don’t see it as being enough to sway the RBNZ from holding rates at 5.50%. But we expect these demand effects will continue to build, and by November the case for further hikes will be clear."

The ANZ economists note that in past monetary policy tightening cycles the RBNZ has "paused" before hiking the OCR again.

"In 2005 it paused for six months before hiking twice, then went on hold for over a year before hiking four more times. A pause is not necessarily a peak; the data will dictate. We expect by November the data will show inflation still sticky, and we see the risk of a further follow-up hike. We’ve pushed back our expectations of cuts a little, to start at the very end of 2024."

In ASB's Economic Weekly, Tuffley says the RBNZ had last week "confounded most people" by signalling that it has now done enough to control inflation.

"Doing a post-mortem, four things stood out as explaining the RBNZ’s stance compared to widespread expectations: a rethink that the early 2023 weather events will now be less inflationary than signalled back in April; downplaying of the inflationary impacts of the recent Budget; taking a wait-and-see view on the inflationary impacts of migration, and; putting more weight than it did in April on the lower than expected level of GDP over 2022," Tuffley says.

"For the time being we’d expect the run of events to keep the RBNZ on the side-lines. We expect the next move in the OCR will be down, but not until mid-2024 when the RBNZ is convinced that inflation will settle in the 1-3% target range. We have picked a 2024 Q2 start-date for OCR cuts, with the OCR set to approach circa 3% neutral levels by mid-2025, a tad earlier than the RBNZ assessment. Signs that inflation is coming off quicker than the RBNZ’s view could bring this timing forward."

Kiwibank chief economist Jarrod Kerr and senior economist Mary Jo Vergara in Kiwibank's First View publication also think the RBNZ's next move is a rate cut, "but not for a while yet".

"The RBNZ looks to be on hold for the remainder of 2023. Now’s the time to wait and see how previous hikes wash through the economy. A slowdown in activity is still forecast. The economy requires rebalancing to bring inflation back to target," they say.

"The economy has clearly softened, and will soften further. Demand is being weighted down by rising interest rates. The RBNZ’s growth forecasts were revised slightly higher, but a slowdown is still forecast – albeit a shallow, short-lived one. A cumulative 0.3% two-quarter contraction in activity is forecast by the middle of this year, with rather flat growth heading into 2024. The economy requires rebalancing through demand destruction for inflation to return to target."