We've had the three doubles - are we now going to get a triple?
Economists at the country's largest bank and largest lender ANZ say a 75-point rise in the Official Cash Rate (OCR) by the Reserve Bank (RBNZ) next month is now "a very real possibility". ASB economists also think a 75-pointer is possible in August.
The ANZ economists have now changed their call and expect the OCR to hit a peak of 4% by the end of this year, having previously expected a high point of 3.5%.
And the ASB economists, who had also expected a 3.5% peak, now see a 3.75% OCR by the end of 2022.
The RBNZ has itself forecast (in its May Monetary Policy Statement) a peak in the OCR of just under 4% by the middle of next year. It will of course be much more than passing interest to see what it is forecasting in its next MPS to be released on August 17 - and whether it will now see a higher peak.
Till the start of this week, there's been a reasonable level of consensus among economists that the OCR will not need to go higher than 3.5% because the economy will start to slow very meaningfully, particularly as house prices have sagged nearly 7% from their November 2021 highs. But the consensus was shattered on Monday.
Monday's super hot, 32-year high, higher than expected, 7.3% annual inflation figure has changed things.
The ANZ economists now pick that there will be 50 point rises in the OCR at each of the next three reviews, with the first of these reviews on August 17.
There have already been three consecutive 50 point rises this year, taking the OCR to its current level of 2.5%.
ANZ economist Finn Robinson and chief economist Sharon Zollner said, as expected, tradables (ie mostly imported) inflation had risen to 8.7% year-on-year to June, from 8.5% in March, pushed higher by surging petrol prices in the wake of the war in Ukraine.
"Non-tradables inflation (ie the more domestically driven component of the CPI) is even more concerning. Non-tradables prices were up 6.3% y/y – increasing from Q1’s 6.0% print, and coming in well ahead of the RBNZ’s forecast for a 5.7% lift in domestic prices," they said.
The data suggested "a significantly more domestically oriented inflation pulse" than the RBNZ had anticipated in its May Monetary Policy Statement.
"That’s a double-edged sword. Domestic inflation tends to be more persistent – but the RBNZ also has more influence over it (in contrast to tradables prices like petrol). With labour demand remaining insatiable, and the Australian unemployment rate at a near-50-year low of 3.5%, super-tight domestic and global labour markets will keep the pressure on inflation."
Robinson and Zollner said the next data that could put serious pressure on forecasts for how fast and how high the OCR needs to go are the labour market figures on August 3.
"That data will no doubt also influence the market’s bets on how likely it is that the RBNZ could decide to front-load the job and raise the OCR 75bp in August. We certainly wouldn’t rule that out, but given the RBNZ’s stated opinion that 50bp moves can do the job, we think they’d need a bit more of a push. The labour data could well provide that (unemployment or wages – or both) if anecdote is anything to go by."
The economists say the real challenge for the RBNZ is how broad-based and persistent inflation is looking, rather than the headline number itself.
"Tradables inflation could fall away quite quickly – especially if oil prices drop sharply and/or global supply chains recover from Covid disruption. But non-tradables inflation is likely to stay high over 2022 and into 2023 as an increasingly tight labour market generates strong wage rises. These wage rises are likely to far exceed productivity growth – and so will in all likelihood be passed on through higherthan-otherwise prices. So while we’re (very tentatively) assuming that Q2 was the inflation peak, the RBNZ’s inflation fight is far from finished."
ASB senior economist Mark Smith said the risk of entrenched high inflation "keeps the onus on the RBNZ delivering a front-loaded pace of OCR hikes and restrictive monetary settings so as to increasingly lean against inflationary pressure".
The ASB economists now see the RBNZ hiking the OCR by 50 points in both its August (to 3.0%) and October meetings (3.50%), followed by a 25 point OCR hike in November (3.75%).
"Our unease over the inflation outlook is such that we would not rule out the prospect of more aggressive OCR moves and a higher OCR peak. This would include a possible 75bp hike in the August MPS and for a higher OCR peak than 3.75% this cycle.
"We have pencilled in OCR cuts from 2024 but this will depend on there being sufficient slack in the labour market and the external inflation environment cooling, both of which have shown few signs of doing so to date," Smith said.
67 Comments
Many thought he was crazy, and some then got jealous as he got closer and closer to fulfilling his true calling. Top comment.
https://www.interest.co.nz/bonds/116706/reserve-bank-makes-it-three-row…
I am sorry Brother Brock that you have also had to face False Accusations . We can only stand firm like the Prophet no matter what the outcome.
Here is a little memory of Tim Mordaunt and the vested interest Brigade trying to put out the Real Estate Fire. I hope it helps with the pain.
Prophet Yvil got in early with this one - yikes!
by Yvil | Fri, 04/05/2018 - 13:36 "So be brave and let the great depression happen, it's the purge the
whole system needed. It's much better than the long slow downward spiral we're on now, which will still
lead to a depression"
If Orr does not hike by 75 bps at each of the next two OCR reviews, he should be sacked immediately and replaced by somebody with the honesty, will and competence to do it. The OCR should be at 4% by end of this year, and 5% by mid next year. Any less than that, and we can forget about controlling inflation and preventing it from getting firmly entrenched.
Cut the engine ,pull up hard,if the wings fall off,deploy ballistic parachute. More clever commentators can provide the analogies.
Lower quartile home values stop falling at the point that there is a net positive return after tax( at owners marginal rate, in the new tax treatment environment), probably half of where they are at now?
yeah its a long way down... I still think it will be greater than 50% falls.
the clock is now ticking and there will be more than a few sweating.
the banks will end up tightening credit to investors.this is what happened after 87 in the commercial space. this segment will end up with commercial rates, 15 yr terms etc.
the banks have moved 15000 to interest only in the last year....and god bless still reporting no defaults. maybe we will end up with 100,000 zombie landlords on interest only and in negative equity
But why are the US 2 and year yields inverted? What might this be telling us? Why are commodity prices retreating; copper, nickel, iron-ore, aluminium?
I don't know just where the OCR will reach-though it will certainly go higher than I thought not long ago-but I still believe that this inflationary storm will blow itself out more quickly than many here believe.
I will be able to put my belief to the test quite soon when i receive a substantial sum from the sale of a small property. At 77 and with cancer-though doing well- I am looking at our 5/10 year government stock to park a significant amount there. if I have the courage of my convictions, I will do so sooner rather than later. Watch this space.
We saw a small glimpse of this pre-Covid where parts of NZ became more expensive to travel to than flying to Australia for a holiday. You can't upset the golden goose, although I suspect many Kiwis will start to think about why it was so much easier to travel to places in their own country they'd never be able to afford to go when the borders were shut.
Te Kooti,
Precisely, and unlike the GFC, China is now in no position to act as the global engine of growth. This is when the stockmarkets get interesting. You can't just throw darts and expect to get winners, now you need to be much more selective as many of the new breed of investors are finding out the hard way. This is when value investors like Buffett come into their own and people like me trail along after them, picking up the crumbs. This is when investing is fun.
Do we have similar issue?
The lack of understanding of the delayed effects of a policy response is staggering to me. It takes much time for OCR changes to feed through to CPI and GDP changes and even more time for these to be reported. Just as the RB cut too fast and too deep because of the lockdowns, the effects current OCR rises will only be fully felt in 2023.
I reiterate again my warning of a too high interest rate induced, deep recession in NZ from early 2023
A year ago the RBNZ was forecasting that inflation would be just 1.5% in the June quarter of 2022.
Printing of so much money, LSAP & excessive borrowing by government has made a mockery of RBNZ & Treasury forecasting.
Where is the mention of stagflation & how difficult it is to beat?
Government is planning to spend more now & RBNZ is countering that with aggressive OCR increases.
The risk of a hard landing & recession is almost inevitable now when we have a team that appears to have no idea how to work together.
In the corporate world the leaders would be fired for such incompetence.
Rubbish Tony.
The problem isn’t the inflation & interest rates going up. It’s the debt that’s been passed out so everyman and his dog can leverage up on property…for twenty years.That is the problem…as it always is in the end. And it’s the tax incentives and direction of capital to these activities that has lead us to this point and fearful near future.
it’s also turned out that allowing your SME sector to use the house as a balance sheet sounds great in practice…but when a war, economic crash or pandemic comes along then they have no retained earnings, cash or capital to survive. So the govt effectively has to bail them all out.
We could have said no wage subsidies and see how the chips fall. We would have our recession two years ago.The strong would have survived and many would have lost the lot.
That is what has happened here. And I don’t see a lot of people asking what are we doing to change this so we are better placed when the next unplanned thing hits us. No let’s just get back to lending out money for unproductive purposes and she will be right!lets import staff and build houses for them….what an economic plan.Import investors too….because we won’t do it.
if you think National has any plan I would suggest you read the book just written about the goings on in their party over the last six years. Utterly hopeless bunch of dishonest scoundrels!
I have no sympathy for those that lose the lot in the coming mess. I’m sure those that have saved prudently and invested in actually producing something will do well.
So what is the inflation and interest rate forecast for 2023 when the Labour Govt unleashes the firehouse to spray the populace with as much free money as possible in order to try and save themselves from election oblivion? Whatever the RBNZ tries to do in terms of monetary tightening its pretty much guaranteed that the Labour Govt will undo it in the form of fiscal stimulus. Its an election year. And since the RBNZ is a Govt entity, and Orr is appointed at the will of the Govt, its also probably guaranteed that Orr will be told to shut up and sit down, and keep out of the way. Elections trump inflation.
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