Westpac economists have now joined those at ANZ in expecting that the Reserve Bank (RBNZ) will hike the Official Cash Rate (OCR) again in November - which would take it to 5.75%.
Economists at the other major banks think that the RBNZ has now finished with rate hikes and that the OCR will be left on its current level of 5.5% for an extended period of time.
The RBNZ itself indicated through its forecasts at the May OCR review that it was not expecting to make any further rate hikes in this cycle.
However, the Westpac economists had previously forecast another rate hike next week (August 16) at the RBNZ's next review.
"We continue to see the RBNZ raising the cash rate to 5.75%, but now expect that to occur in November instead of August," chief economist Kelly Eckhold said in Westpac's Weekly Economic Commentary.
"While recent data have highlighted the lingering strength in domestic inflation pressures, at this stage we doubt this will be enough to overcome the RBNZ’s strong bias to keep the OCR at 5.50%. Nevertheless, we think resilience in economic conditions and sticky inflation will eventually force the RBNZ to act."
He said since May of this year the Westpac economists have had the view that the RBNZ would need to tighten policy further to ensure a timely fall of inflation to within the 1-3% target range. This view was predicated on a sense that current very high rates of inflation would be slow to recede and that risks to the longer-term outlook were tilted towards a very protracted easing in inflation pressures. Strong net migration was seen as supporting both the housing market and the economy right at the time the RBNZ would have hoped that growth would be quickly slowing and providing much needed disinflationary impetus.
"In large part, the accumulated evidence has supported our view," Eckhold said.
"However, while we are seeing strong and potentially concerning data, that probably won’t be sufficient to budge the RBNZ’s Monetary Policy Committee in August. The RBNZ has previously signalled its very strong bias to keep the OCR steady at 5.5% until the second half of next year, and that’s a high hurdle to clear. So on this one we must play the man (the MPC) as opposed to the ball.
"We retain confidence that recent trends will continue: the economy will likely continue to be supported by ongoing strong migration, the housing market will continue to strengthen, and inflation will only ease gradually at current interest rates. In addition, we continue to doubt the economy will experience an outright recession in the second half of 2023 as forecast by the RBNZ (although risks from the concerning situation in China and weaker agricultural commodity prices warrant keeping a close eye on that element of the forecast).
"Against this backdrop, underlying inflation pressures will likely prove stickier than the RBNZ is expecting. While headline inflation is set to continue easing as earlier supply disruptions drop out of the annual calculations, we don’t expect a return within the target band until late next year. And a return to the 2% target mid-point will likely take significantly longer.
"Given those conditions, the interest rate reductions we had previously expected to occur in the second half of 2024 will likely now occur more slowly, consistent with the RBNZ only easing cautiously as inflation gradually eases. We suspect many other central banks will be taking a similarly cautious approach."
In their Weekly Data Wrap, ANZ economists said they believe that ultimately NZ's labour demand will slow; "it cannot remain immune to slowing momentum in the economy indefinitely".
"Weak labour demand combined with persistent strength in labour supply (reflecting current high levels of net migration) is expected to see the unemployment rate lift sharply, peaking at 5.2% in 2025," they said.
"What matters for the RBNZ is pace of that increase, and therefore guiding the labour market out of inflationary territory. The longer the labour market remains beyond sustainable levels, the more oxygen is given to inflation through persistent labour cost inflation finding its way into consumer prices. We don’t expect that the labour market will transition to an outright disinflationary state until Q1 2024, meaning more persistent domestic-driven inflation and more work for the RBNZ to do.
"As capacity pressures in the labour market unwind, wage growth should moderate. Q2 marked the start of the descent from the peak, but given conditions remain inflationary, wage growth will take some time to return to levels consistent with inflation at target, and are a key driver of our forecast of persistent domestic-driven inflation.
"There are plenty of risks to the outlook, which we will set out in our forthcoming Quarterly Economic Outlook, but we continue to expect the RBNZ will hike again. A relatively more resilient labour market, culminating in more persistent inflation pressures, is central to that view."
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