Sharon Zollner, chief economist at ANZ New Zealand, says the Reserve Bank (RBNZ) may lift the Official Cash Rate (OCR) to 6% at its next meetings in February and April.
In a note released at midday on Friday, the top economist at the country’s largest retail bank said a series of “small but unwelcome surprises” was enough to restart the hiking cycle.
These include strong consumption growth, slightly higher non-tradable inflation, and a more resilient than expected labour market.
“None of them are game changers, but given the starting point was the RBNZ already very nearly over the line to hike again, no game changers are needed,” Zollner said.
In addition to these bigger news items, there were other indicators of capacity pressure in second tier economic surveys and high-frequency economic activity data.
Strong net migration, recovering commodity prices, and a decline in wholesale interest rates were also reasons the central bank might want to lift interest rates further.
Zollner said there was a “pretty long list” of hawkish developments that should add up to a higher OCR track than was included in the November Monetary Policy Statement.
That November update signalled the RBNZ’s Monetary Policy Committee would likely hike interest rates again if there was any delay to inflation being back in the target band.
“Indeed, their OCR forecast peak of 5.69% implied that the burden of proof was now on finding reasons not to hike, strictly speaking”.
Zollner said it wasn’t worth restarting the hiking cycle just for a 25 basis points increase and so two hikes are more likely than none. The OCR is currently at 5.50%.
It was possible the policymakers would hold the rate and try to talk hawkish enough to boost wholesale interest rates, but it already tried that in November with mixed results.
Kelly Eckhold, chief economist at Westpac NZ, said he thought market predictions of another rate hike were "overdone".
He interpreted the new data to mean that rates will be held at 5.50% until 2025 as the central bank “squeezes sticky inflation out of the economy”.
Zollner acknowledged she had “flip-flopped” on her previous forecast and that restarting interest rate hikes would be distressing for many households and businesses.
“The shock value of restarting hiking and re-establishing uncertainty about how high rates might go could have a chilling impact on the housing market and investment beyond what ‘50bp’ would normally mean,” she said.
If this scenario played out, the Reserve Bank would likely cut rates faster to get back to a more neutral rate around a similar time as the previous forecast.
Zollner said it was not unusual for central banks to resume hiking after a pause. The Reserve Bank did so three times after the Global Financial Crisis.