Westpac economists are sticking with their longstanding pick that the Reserve Bank will hike the Official Cash Rate again at its next review in February.
This is despite markets currently pricing a first fall in the OCR (currently at 5.5%) by August of 2024.
However, the RBNZ itself in its last OCR review of 2023 last week did come out with a surprisingly strong, hawkish message and did raise its OCR forecast track - giving an increased possibility of an OCR increase - but later in 2024 than Westpac is forecasting.
In Westpac's Weekly Economic Commentary, chief economist Kelly Eckhold said the RBNZ’s message and core concerns "now map more closely to our own".
"The relatively high probability of a hike in Q3 2024 indicates that all [RBNZ OCR review] meetings from now should be considered “live”," he said.
"The RBNZ seems more focused on ensuring that inflation hits the middle of the target range in the next 18 months to 2 years. Hence, given still persistent core inflation, strong population growth and an upwardly revised long-run neutral OCR (increased a further 25bp to 2.5%) the clear message is the balance of risks has shifted towards a need for further tightening.
"And certainly, there is reduced tolerance for upside surprises to inflation – which is also consistent with the new government’s objectives when the new Monetary Policy Committee Remit (and new RBNZ Act) is promulgated."
Eckhold said the RBNZ's message of last week showed that, firstly, the market is on notice that policy easings are very unlikely for the foreseeable future. Easings are going to need to be motivated by a much weaker run of data on future core inflation pressures, and housing market trends.
"Secondly, a message for the new Government is that the fiscal stance needs to be noticeably tighter than was embodied in the Pre-Election Economic and Fiscal Update (PREFU). The new Government’s fiscal plans in the forthcoming Half-Year Economic and Fiscal Update (HYEFU) need to reflect a tight stance to avert the need for a higher OCR."
Eckhold said there was still "plenty of water to flow" under the bridge ahead of the RBNZ's February 2024 OCR review "and so it’s possible a hike in the OCR comes later than February (or not at all)".
He said the Westpac economists will be watching the following key data and events:
• The Q3 GDP report on 14 December. Next week will see some key partial indicators of Q3 GDP. We currently expect modestly weaker growth than the 0.3% factored by the RBNZ. The tone of that report (and the interpretation of downward revisions to historical data already foreshadowed by Stats NZ) will be important.
• Migration data and all housing-related data. The RBNZ’s concern about the impact of migrant inflows on domestic demand, including via the housing market, which makes data on migrant inflows, housing turnover, house prices and dwelling rentals over coming months critical.
• The HYEFU. The new fiscal stance (and other policy changes) will be factored into the RBNZ’s February Statement. The updated estimated “fiscal impulse” and analysis of other new policies (investor housing) will be very important.
• The Q4 CPI report on 24 January and preceding monthly updates. Non-tradables inflation will be key. We currently forecast the Q4 outcome to be slightly below the RBNZ’s updated forecast, but the data needs to confirm a significant step-down in core inflation indicators (see chart).
• The Q4 labour market surveys on 7 February. These Labour market indicators were downplayed by the RBNZ this week and our forecasts for Q4 don’t materially differ to the RBNZ’s. But we are sure that wages and unemployment rate trends will ultimately matter.
Kiwibank economists, meanwhile, are still picking the OCR to come down in 2024 - though later than their earlier pick, which was in the first half of the year .
In their latest First View publication, Kiwibank chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say the RBNZ "came out a lot more hawkish than expected" last week.
"And it was the surge in migration that triggered the RBNZ’s sterner tone," they said.
The impact of surging migration "is double sided", they said.
"On the helpful side, the spike in available workers is dampening wage pressure. And the disinflationary force is especially strong given the tightness in the labour market to begin with. That’s the good news. The labour market is softening sooner than the RBNZ initially forecast.
"But on the other side of the same coin, more people means more demand for just about everything. And signs of an increase in demand are surfacing. Rents in particular are high above pre-covid levels and on the rise. Broader pressure within the housing market will also mean stronger house price growth. And with that, comes the wealth effect. Consumption is weak at present, but would be even weaker if not for a fast-growing population."
The Kiwibank economists said while the RBNZ’s migration forecasts were little changed between forecasting rounds – still expected to settle at about 37,000 in the next few years – "their assessment on how inflationary it will be has changed".
"Previously, the supply side impact (via slowing wage growth) was assumed to be the dominating force. But now, the RBNZ is wary of the strengthening demand impulse. Risks to the inflation outlook are weighted to the upside. Upside risks for which the RBNZ has very little tolerance.
"Not only was the peak raised, but thoughts of rate cuts were also squashed. The new track has now pushed out the first rate cut to 2025, which would mean RBNZ staying on hold for ~2 years! We disagree.
"We acknowledge that the risk over the next 6-9 months is tilted toward further tightening. But we still believe the RBNZ will be in a position to normalise policy next year. Rate cuts could well be a 2024 story. Just later in 2024. We now pencil in the first rate cut in November next year. But we’ll park this debate for later. For now, to hike or not to hike – that is the question."
Westpac's Echold said in respect to the forthcoming changes to the RBNZ’s Remit and Act to focus the RBNZ solely on inflation control, he doesn’t think that these adjustments will do much for the conduct of policy in most circumstances.
"Perhaps an exception would be the case of supply shocks which might temporarily boost inflation," he said.
"However, in the current context we think these adjustments will affect the RBNZ’s assessment of the balance of risks for policy in the next year or so.
"The government is sending the RBNZ a clear message that inflation needs to be its highest priority and there is no room to be taking chances that might cause inflation to remain well above 2% in mid-2025.
"Hence, we think the upshot is that we should expect the RBNZ to be unforgiving of any shocks that boost the growth and inflation outlook over the next year. Also, the RBNZ will likely be less willing to pre-emptively ease, as markets seem to currently expect. A pre-emptive easing that turned out to be the wrong judgement would not be greeted warmly by the Minister given the new Remit."
24 Comments
I wouldn't be so flippant and dismissive.
Remember, they are ones currently determining your future term mortgage and deposit rates. Your coin has none of that responsibility.
It is only a fool with an inflated ego who is dismissive of bank economists when looking at rolling-over their mortgage or term deposits term.
While there is no certainty what will happen (even RBNZ currently aren't decided and they make the decision); I prefer to look at a range of bank and other economists rather than the over-inflated egos of some unqualified anonymous keyboard warrior commentators on this site who know jack-shite sitting in a dark room that have been considerably and consistently far, far more inaccurate in their outlook than bank and other economists.
I would also be considering Hawkesby's comments https://www.nzherald.co.nz/business/reserve-banks-tough-talk-isnt-a-gam…
I prefer to look at a range of bank and other economists rather than the over-inflated egos of some unqualified anonymous keyboard warrior commentators on this site who know jack-shite sitting in a dark room that have been considerably and consistently far, far more inaccurate in their outlook than bank and other economists.
I recommend reading all of Nassim Taleb's seminal work. If you have, think of Fat Tony.
Would banks ever consider signalling a rate rise in order to encourage people into fixing at the current rate, because the bank knows rates are actually going to fall?
Inflation has to be down next year as it peaked a while back. The dollar has also strengthened, and the economy is slowing. The only people still spending are those without debt and a rate rise won't affect them anyway, in fact they would have more cash to spend as their savings rate increases.
I know Westpac are always the most hawkish, but they are still using the standard monetarist models, which focus on the govt fiscal impulse but downplay the credit impulse (net bank lending). Some of the others (notably BNZ, Kiwibank) seem to be using less conventional models - i.e. ones that better reflect the real world!
Anyhow, GDP per capita data will almost certainly be negative next week - maybe negative enough to bring the overall figure down. OCR will be coming down in April / May.
Again anecdotal, but I work in an industry where I talk to a lot of business owners directly and we're definitely hearing that things are getting very tough out there. Anyone tied to the construction industry is seeing order volumes drop off a cliff, staff being managed out. Also many in retail are reporting a significant fall in demand lately. Will wait to see what the stats say but I have a feeling it's going to be a very bleak picture come Feb/March.
I sure hope Westpac are wrong, I doubt the economy can handle another increase, that's if it can handle the current ones.
I think inflation is now mostly dead, I won't be expecting a 7% pay rise next year and I doubt any kind of retail shop could increase their prices by that much either and still have customers. There will still be an element of passing on higher costs, but that will be only in some sectors.
So, all the government has to do is tweak immigration settings, and that will take away one of the inflation drivers. If they were actually that worried about inflation, they would be assisting the RBNZ. So either the RBNZ either has a goal to continue deflating the asset bubbles like Powell in the US, or the NZ Government has a vested interest in keeping inflation high.
Found in the Monetary Policy Outlook in the RBNZ's November MPS ...
World interest rates have also increased, placing downward pressure on the New Zealand dollar exchange rate and, all else equal, boosting inflationary pressure within the economy.
From the RBNZ's November MPS ... Read it again. (lol)
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