Here we go. Watch, Worry and Wait Part II.
This coming Wednesday (August 16) will see the Reserve Bank's second consecutive 'do nothing' Official Cash Rate review since it raised the OCR to 5.50% in May and at the same time signalled, via its forecasts, that it would not be going any higher - not in the foreseeable future. At the last review in July the RBNZ made good on this intention by duly leaving the OCR unchanged.
This time around the review is accompanied by a new Monetary Policy Statement (MPS) - the first since the May review.
This document will give us the opportunity to see if the watching, worrying and waiting ('watch, worry and wait' is a term the RBNZ itself uses) has led to any changes in how the central bank views the way forward from here.
So, most interest will centre on the forecasts part of the MPS towards the back of the document and whether any of the key forecasts have changed since the May MPS was issued.
To refresh memories, here's an abridged table of the main forecasts made then. (The full table appears on page 57 of the MPS.)
How might the new forecasts differ from those in May?
Well, we need to consider the most recent economic events.
To take the CPI data first, you can see from the table above that the RBNZ was picking 6.1% annual inflation as of the June quarter, while the actual figure was 6.0%. Great! All on track then! Well, kind of...
The reality is that the drop in the inflation rate from 6.7% to 6.0% was largely a story of falling petrol prices helping to drive a sharp drop in the so-called 'tradable' or imported, inflation. But it's 'non-tradable', domestically generated inflation that the RBNZ can do something about and therefore directly worries about. And as of June the non-tradable annual inflation rate had fallen only slightly from 6.8% to 6.6%, while the RBNZ had forecast it to fall to 6.3%.
If that's not great news well the further cloud on the horizon is that petrol prices, as I'm sure you've noticed, have gone up again since the start of the September quarter. And of course at the end of June the Government reversed its previous cut of petrol excise duties.
The upshot is that the 'headline' inflation figure for the September quarter might well actually rise again to above the previous 6.0%, while the RBNZ's May forecast was for it to keep falling to 5.7%. This should be a short term blip. But it won't inspire confidence in the wider community that all is on track.
Not wonderful news either for the RBNZ was delivered via its own Survey of Expectations in the past week, in which the most watched measure, the expectation of inflation in two years' time actually increased very slightly to 2.83%. This contrasts sharply with the RBNZ's own forecast as of May that inflation will be sitting comfy on its explicitly targeted level of exactly 2.0% in two years' time.
The survey result shouldn't be taken too literally, as in don't expect inflation to be 2.83% in two years' time. But do take that result as conveying apprehension out there that the RBNZ's not got this inflation battle in the bag yet.
So, watch out for a tweak to that September quarter inflation forecast in the new MPS, but more significantly perhaps, we need to keep an eye on the December quarter forecast (which was for 4.9% as at May) and see whether the view has changed.
As at May the RBNZ was picking inflation to get back into its targeted 1% to 3% range in the second half of next year.
Watch out then for any slippage in the timing of inflation getting back under 3% in the RBNZ's new forecasts in the coming week. This would cause flutters in financial markets.
Right, so, that's inflation. Then there's the labour market and the June quarter data. The employment figure came in much higher than the RBNZ forecast, but the wage inflation was pretty much in line with what the RBNZ picked, while unemployment, at 3.6%, came in actually a touch higher than the RBNZ forecast.
That latter fact might be sufficient to encourage the RBNZ to stay with its May pick that unemployment will shoot up to 4.1% in the September quarter and 4.6% in the December quarter. These were very bold picks that effectively suggest the labour market will capitulate in the second half of the year. There's a fair degree of scepticism among economists that the labour market will go that cold that quickly - though everybody agrees the unemployment rate will rise, just not necessarily that fast.
There's no doubt a slowdown is under way though. And further evidence was provided of that in the past week with the latest electronic cards spending data showing a decline for the second month in three.
For the RBNZ, creating some 'slack' in the labour market (IE more jobless) is crucial to the inflation fight, since this will dampen down spending and reduce pricing pressure. So, we should keenly watch whether the RBNZ sticks with view on the unemployment rate, or backs away and picks a slower cooling of the labour market. If it's the latter, this will cause concern.
All right, so, there go the big economic stats we need to be worried about. But then there's the not-at-all insignificant matter of what the RBNZ will do with its forecasts of the OCR level in the future. The May forecast was for the OCR to be at 5.50% till the second half of 2024 and then slowly dropping.
Even if the RBNZ were of a mind that it may yet raise the OCR again in future, I doubt whether it would be inclined to indicate as much yet. If it were for example, to just quietly slip in a new peak of 6.0% into the new set of forecasts in the coming week this would likely produce an out-sized reaction in the wholesale interest rate markets.
And at the moment the markets are behaving probably pretty much as the RBNZ would like.
For a long time the market was getting ahead of itself and pricing in future reductions in interest rates - as soon as later this year. But current pricing has just a under 50-50 chance of a further OCR hike before the end of this year and then for reductions to not begin till the second quarter of next year.
As far as the RBNZ's concerned, this is probably about right, other than that maybe it would like the market's view around timing of OCR reductions to be pushed out a bit further.
So, if there is to be a tweak of the OCR forecast in the coming week, probably the most likely thing is for the RBNZ to push out the forecast time for when the OCR starts to come down from 5.50%.
No OCR hike in the coming week then. But much to look out for. This watching, worrying and waiting thing is stressful. And we might have a fair bit of it to do yet.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.