The odds of the Reserve Bank needing to hike the Official Cash Rate by 50 basis points at each of the next rate reviews continue to "edge up", according to ASB economists.
The RBNZ is due to have its next interest rate review on Wednesday, April 13, followed by another review and full Monetary Policy Statement on May 25. It uses the OCR as its main weapon to - in theory - maintain inflation in the range of 1%-3%, with an implicit 'midpoint' target of 2%. However, annual inflation hit 5.9% as of the December 2021 quarter and economists now see it hitting around 7.5% by the middle of this year.
After beginning to raise the OCR in the second half of last year from the low point of 0.25% (it's now currently at 1.0%), the RBNZ had strongly signalled it would tighten monetary policy with 'measured steps' - which was seen as a clear message it would only be raising the OCR in 25bp increments.
However, that all went out of the window when the RBNZ released its last Monetary Policy Statement in late February and said it was "a finely balanced decision" whether to raise the OCR then to 1% or 1.25%. It opted for the smaller increase to 1%, but said clearly that it was "willing to move the OCR in larger increments if required over coming quarters".
In ASB's latest Economic Weekly, economist Nathaniel Keall said that "for now" ASB economists were sticking with their forecast of 25bp hikes at each of the next two RBNZ meetings, "but the odds probably aren’t much better than a coinflip at this point in proceedings".
He said policymakers "are in a tight spot" in the current environment.
"Typically, we expect the labour market to tighten when activity runs hot, pushing up wages and boosting inflation."
In that scenario, tightening monetary policy quickly is "uncontroversial", Keall said.
"But in the current environment, it’s not strong economic activity that’s holding the smoking inflation gun: rising energy costs and logistics disruption are playing havoc with non-labour costs for many businesses," he said. At the same time unemployment was at multi-decade lows.
"Thus, the RBNZ is faced with the task of continuing to hike while the growth outlook has darkened both here and overseas. There’s even been the odd instance of Treasury yield curve inversion recently – a closely-watched indicator of a recession in the US," Keall said.
"Despite that dynamic, the odds of the [RBNZ] needing to hike the OCR by 50bps at both or either of the next two meetings continues to edge up in our view."
Keall said there was "no perfect environment" in which to make monetary policy in.
"...Uncertainty and the risk of unintended consequences are staples of the job.
"All policymakers can do is make a call on which target they are at greater risk of missing. On that front, it’s still clearly that 1-3% CPI inflation band that the RBNZ is most clearly at risk of missing for a prolonged period.
"And bear in mind it’s employment rather than growth that the RBNZ targets as the other part of its dual mandate.
"While growth and employment are obviously heavily correlated, the starting point for the labour market is so tight that slower growth and higher interest rates won’t necessarily be a big sucker punch.
"Indeed, eroding real incomes is probably the bigger risk for those on lower pay or in insecure work if inflation pressures don’t start to come down."
Across at the ANZ bank, their economists have already predicted that the RBNZ will have to hike by 50bp at both the April and May rate reviews, which, if correct, would double the OCR to 2%.
And they reiterated that view in their latest NZ weekly Data Wrap.
"All up, it’s clear that the RBNZ’s measured approach thus far (ie hiking in 25bp increments) is not looking sufficient to bring inflation and inflation expectations back down quickly enough," the ANZ economists said.
"And the longer it takes for the RBNZ to really start to gain traction on inflation, the more the risk builds that inflation expectations will become significantly unanchored from the 2% target midpoint. We’re forecasting 50bp OCR hikes in April and May, which we hope will be enough to start bringing inflation down to a tolerable level."
The ANZ economists said people "are clearly very concerned" about rising inflation.
"That’s understandable – businesses are watching rapidly rising input costs squeeze their margins, while households on fixed incomes will be cutting back discretionary spending as the cost of essentials surges.
"Aggressive interest rate rises will put a dampener on economic growth as the RBNZ fights inflation, but we continue to forecast a ‘soft’ landing for the economy.
"That really reflects the crown jewel in the New Zealand economy right now – our extremely tight labour market. We’re forecasting that unemployment will drop slightly further from 3.2% at the end of 2021, to a new record low of 2.9% over mid-2022. In combination with rapidly rising wages over this year, we expect that should provide a pretty solid foundation for the economy to tolerate the strong (and necessary) medicine being administered by the RBNZ."
45 Comments
All I can do is laugh really, I said the last two hikes should have been 50bps, instead what did we get ? was it nothing then 25bps or something stupid. The longer the RBNZ leave the hikes the worse things are going to get, still its just money and your paying for the actions of the lolly scramble that was either way. Two consecutive 50bps hikes now will have people shitting their pants, I think its unlikely we are just going to get a 25bps at each review in the hope that nobody notices it.
It's 2100, your great-grandchildren are sat in a political economy lecture. The lecturer is explaining to the students that, at the start of the century, the people running the economy thought that stopping people working was the best way to control prices.
'And, if that wasn't stupid enough', says the lecturer, 'the thousands of people who weren't working were then treated like dirt and left to live in poverty in cold, damp housing'
Any sane system faced with supply-side constraints, would put under-utilised people to work on increasing productive capacity. It's not rocket science.
Imagine a village leader explaining to his villagers that they can no trade their products for enough food from other villages because of food shortages. Is the answer 'Let's all sit around and starve' or is it 'Let's get to work and grow some food?'
People without property get shafted yet again.
First they missed out on the covid "emergency low rates" lolly scramble. And now they have to suffer high inflation while the RBNZ dithers around trying to keep asset prices up... when it SHOULD be aggressively raising OCR.
Fitzgerald, your hate of property owners clouds your judgement, the OCR is not being raised or not, to suit property values, the OCR is set to combat inflation without trying to kill the economy and jobs. (But yes, I think it should be raised in 0.5% increments and have thought so before)
"Across at the ANZ bank, their economists have already predicted that the RBNZ will have to hike by 50bp at both the April and May rate reviews, which, if correct, would double the OCR to 2%."
If Banks are selling 6% mortgages now, what will they be selling in 2 months time ?
I am not going to tell you that.
But TTP has kindly made a video of himself explaining it to you.
The enigma is great in this one, Luke. Great enigma lurks in great minds, Luke…
I was starting to warm to Tony A late last year, but he’s reverted to old habits recently. Maybe he’s getting senile, he’s talking about 10% house price falls as if he never even said three months ago prices will rise 5%!!!
just not credible in my view, Yvil, to swing around that wildly in forecasts.
Some Advice please:
I live out of Auckland but rent a tired annex off a house in a pleasant suburb as I stay in the city fro 3 nights most weeks. I have had a good return on an investment and want to use it to help buy something modest (2 bedroom unit) in a nice area - not an apartment. I would arrange lending to maximise negative gearing on the unit.
I was planning to sit on the sidelines and wait but already a couple of contenders have passed in at auction and the REA's have asked if I wanted to negotiate. I've stood off for now, but if I did go in to bat, what % off the 2021 CV would you suggest I pitch at - ball park. My feeling is 30%? I'll need this place for 10-15 years and there is a tax angle due to it being entirely business use just for background.
Negotiate aggressively or just hang fire?
Hi,
Good question, I would wait, not so much because I think prices will go down by x% but because the stock available for sale is very likely to keep rising. This means you will have more choice and if you're thorough and patient enough to comb through many, many properties, you will be more likely to find a great deal. In the meantime, keep looking though, so that when you do come across a great deal, you will recognise it and be ready to act quickly.
Cheers
Perhaps you want to edit your post Caughtinthemiddle? I'm guessing you mean "what % off the 2021 CV" but you wrote "what % of the 2021 CV". There is a big difference :-)
It seems to me that the market will be quite a bit softer after another couple of interest rate rises. So holding off until at least June seems like a sound strategy if you can do so. I'm not sure you'd have too much luck just yet at CV minus 30% anyway.
IMO the OCR tightening hasn't properly started yet. The 3 x 0.25% rises are merely a reversal of the 0.75% "emergency drop" at the onset of Covid. Likewise, interest rates have significantly risen since their lows mid 2021 but they are really not much higher than pre Covid. The tightening is only about to start… (I predict a 0.5% rise this month)
If RBNZ where going to raise the OCR by more than 25bps this cycle it would have been at the last meeting when you had a confluence of factors clearly going to kick inflation up substantially. If they didn't then I doubt they would do now that the situation is stabilising.
Inflation will likely remain above-target for years until RBNZ catch up with reality or until the economy overheats and crashes.
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