Retail interest rates could now be getting close to their peaks after the latest Consumers Price Index figures indicated inflation may be at last slowing.
The Reserve Bank (RBNZ) is now likely to be faced with wholesale interest rates pricing in a lower peak to the Official Cash Rate than it has been forecasting.
While the actual inflation result - annual inflation as of the December quarter staying the same (from September) at 7.2% - may not in itself seem encouraging, the fact that domestic-generated inflation considerably undershot expectations was perhaps a clear sign that the interest rate hikes we've already seen could now be having an impact.
The RBNZ, in its extremely hawkish Monetary Policy Statement in November forecast that inflation would rise to 7.5%, while it saw domestically generated (non-tradeable) inflation rising to 7% from 6.6% as of September. In the event the domestic inflation came in at 6.6% again.
Based on its hawkish forecasts the RBNZ had indicated there would be another 75-point rise to the Official Cash Rate (currently on 4.25%) in the next review on February 22. And the RBNZ forecast the OCR to peak at 5.5% in the middle of 2023.
But based on the actual inflation outcome, it can be anticipated that wholesale interest rate markets will now start 'pricing in' a lower - 50 basis point rise to the OCR next month. Retail interest rates are most strongly directly influenced by what happens in the wholesale interest rate markets, so an easing in those markets will likely indicate that we are now close to the top in terms of mortgage and deposit rates. But that doesn't mean these rates will be coming down any time soon. Much will ultimately depend on how long the OCR stays up.
While there's a perhaps unusual diversity of views coming out from the economists on what happens next, several have come out very clearly in favour of the RBNZ hiking the OCR now just by 50 points in February and, importantly, not ultimately raising the OCR as far as it has said it will.
Economists at the largest bank, ANZ, changed their call of what would happen at the next OCR review and are now expecting a 50 point rise - and a peak OCR now of 5.25% against their earlier expectations of 5.75%.
Kiwibank economists said "enough is enough" and said they thought the OCR would rise by 50 points in February - but should only rise by 25. And they see a peak of just 5% now.
Westpac economists are now forecasting a 50 point rise in the OCR in February policy meeting (having previously forecast a 75bp increase). "We continue to expect a 50 bp rise in April with a pause after that time. Those increases would take the cash rate to a peak of 5.25% - lower than the 5.50% peak we previously projected. That’s also below the 5.50% peak that the RBNZ had signalled in their last published forecasts from November".
ASB economists are still picking 75 points in February "but acknowledge the risk of a more moderate pace of RBNZ hikes (including 50bp in February)".
BNZ economists said the inflation outturn "left us more convinced that the Reserve Bank does not need to raise its cash rate by 75 basis points when it delivers its rate-set verdict on February 22. Unfortunately, it leaves us equally convinced that, in the eyes of the central bank, it will be a line ball call." BNZ is still officially picking a 75 point rise.
ANZ economist Finn Robinson and chief economist Sharon Zollner said inflation is "clearly still far too strong", but the stabilisation in non-tradables inflation is a welcome development.
"The inflation numbers clearly weren’t as bad as the RBNZ feared in November, and signs that inflation will ease meaningfully over 2023 are becoming increasingly clear."
Robinson and Zollner say, however, that the RBNZ "will be wary of giving markets a free rein" to start pricing in OCR cuts, which could see fixed mortgage rates fall meaningfully. They believe OCR cuts "remain firmly off the agenda" for the foreseeable future unless some "left-field event" happens.
BNZ head of research Stephen Toplis said market pricing could yet determine the February OCR outcome, "especially if the Reserve Bank is walking the tightrope that we think it is".
He said if financial markets push strongly for a 50 point move "it will be hard for the RBNZ to stand in its way".
"Irrespective of our final call on the Reserve Bank’s likely actions, we maintain our long-held view that a peak in the cash rate of 5.50%, as touted by the Bank in November, is probably unnecessary."
Westpac acting chief economist Michael Gordon and senior economist Satish Ranchhod said they are still updating their forecasts "but at this stage it looks like inflation will track well below the RBNZ’s forecast over 2023".
"...We’re still left with a strong inflation outlook and the need for continued interest rate increases to get inflation back inside the 1% to 3% target band. However, the extent of further policy tightening required to do that doesn’t look like it will be as large as the RBNZ had previously assumed. As a result, we’ve revised down our forecast for the peak in the Official Cash Rate," Gordon and Ranchhod said.
The Kiwibank economists, chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara said the case for a smaller increase to the OCR in February is building.
"The NZIER survey showed business confidence plunged to an all-time low in Q4. An overwhelming majority of firms see a deterioration in economic conditions ahead and expected trading activity fell to near GFC lows.
"On housing, the latest REINZ market update showed that the correction continues, with December marking the 13th consecutive monthly fall in house prices. And today’s [CPI] report revealed that an downtrend in inflation is forming.
"With each outturn, the data are showing a weakening economy. Rate hikes are working, already. We don’t need more outsized, catch-up hikes."
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