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.
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