Westpac economists say they have growing concerns about the Reserve Bank's monetary policy strategy and risk management approach.
In Westpac's Weekly Economic Commentary, chief economist Kelly Eckhold says it will be critical for the RBNZ to be successful bringing inflation to heel expeditiously.
"Any further delay in returning inflation to target raises risks of an even more protracted and bumpy ride," he said.
The RBNZ last week left the Official Cash Rate unchanged on 5.5% and continued to signal that while it's not planning to raise the OCR further, rates will need to stay high for a protracted period in order for inflation to be pushed back into the targeted 1% to 3% inflation range. As of the June quarter, inflation was 6.0% down from a peak of 7.3% last year.
Eckhold said the risks "need to be well managed". In highlighting his growing concerns on the RBNZ's approach he pointed to the fact that since the central bank's December 2022 Monetary Policy Statement, it had indicated a clear strategy of getting the OCR to and keeping it at 5.5% until the September quarter of 2024 before easing.
"This strategy has not been adjusted to reflect some significant changes in the outlook which add inflation pressure – for example the migration cycle and the expansionary 2023-24 budget."
Now, when faced with concerns of more persistent inflation the RBNZ is choosing to extend the on-hold period and are betting that an OCR of 5.5% is sufficiently restrictive to compensate, Eckhold said.
"However, if this judgement is wrong, then New Zealand could be facing a protracted period of strong domestic inflation pressures.
"In turn, that could feedback back into higher inflation expectations, which would make it harder to eventually bring inflation down.
"Given that risk, an alternative strategy would be to raise rates earlier and then ease earlier should negative risks take hold. If there were downside risks to the RBNZ's assessment of the inflation outlook then the RBNZ's approach would be more understandable – but the RBNZ doesn’t currently see the risks this way," Eckhold said.
In any case, inflation is "so elevated" the prospects of an undershoot of the inflation target seem remote, he said.
"...There is a widening of the distribution of future OCR paths emerging. It will be important for the RBNZ to act early should it become clear that the upside risks to inflation become more dominant.
"Let’s both plan for, as well as hope for, a smooth transition."