RBNZ chief economist Paul Conway says future path for the OCR is conditional on how the economy evolves as some bank economists bring their forecasts for increases forward

While New Zealand’s economic outlook remains uncertain, some economists are pencilling in an Official Cash Rate (OCR) hike earlier than December and some have even brought forward their forecasts following the Reserve Bank's (RBNZ) latest Monetary Policy Review.

The RBNZ left the OCR unchanged at 2.25% on Wednesday. However, it warned that "decisive and timely" OCR increases may yet be required depending on how strong and persistent inflation gets. The RBNZ is projecting annual inflation of 3.0% in the March quarter, versus the 3.1% recorded for the December quarter, and jump to 4.2% in the June quarter.

At a press conference following the RBNZ’s Monetary Policy Review (MPR), Governor Anna Breman said while the Monetary Policy Committee was not close to a rate hike for this OCR announcement, the committee had discussions around the “possibility of whether a relatively early rate hike could mean that we needed to do fewer rate hikes if we saw medium-term inflation being higher.”

Inflation projection of 4.2% ‘highly uncertain’

Breman says the central bank’s inflation forecast for the June quarter in particular is highly uncertain.

“Oil prices falling today means that that inflation forecast of 4.2% for the second quarter could be on the higher side,” Breman says.

“But we’ve also seen a lot of volatility in oil prices and if something happens, we can see oil prices staying above $100 and then unfortunately, there is also upside risk to that forecast. But if this persists and oil prices now fall faster than the future prices were indicating, then that forecast is actually on the higher side.”

Asked if the 4.2% inflation projection could be a conservative estimate, Breman says' “we try to be very clear on which assumptions we make to come up with that number”.

“We use the current oil price and what that means for fuel prices in New Zealand and the future prices as of yesterday. So as of yesterday, assuming that outlook for oil prices and what that means for fuel prices in New Zealand, and also assuming that some of that will be passed onto higher transportation costs, airfares and to a little extent, also to food prices.

“That is exactly what the 4.2% is based on. But as we’ve seen today, oil prices fell quicker than the future market price. So if that persists, that is on the higher side.”

But on the other hand, Breman says if oil prices rebound and go up to a higher level again, then that projection is on the lower side.

“That’s why we stress that there is a lot of uncertainty with that forecast.”

What’s guiding the RBNZ

Over the coming months, Breman says the RBNZ will be looking for any signs that medium-term inflationary pressures are increasing and would be outside of the 2% mid-point of the RBNZ's target.

Breman says the RBNZ is looking at this like if headline inflation is spilling over into core inflation, medium and long-term inflation expectations, and wage growth as those tend to be good predictors of medium-term inflation.

“Those are the things that are guiding us when we’re looking at whether or not we would need to hike rates or not.”

Breman reiterated that the RBNZ would “act to ensure that medium-term inflation returns to target.”

Not close to a rate hike this time

Breman says there was a consensus to hold the OCR at 2.25% and the Monetary Policy Committee was not close to a rate hike.

“We discussed the possibility of whether a relatively early rate hike could mean that we needed to do fewer rate hikes if we saw medium-term inflation being higher. But there was definitely no discussion or strong advocates for hiking at today’s meeting.”

As this was not a Monetary Policy Statement meeting, the committee did not present an OCR track. “We don’t usually do that when we have a Monetary Policy Review,” Breman says.

When pressed further, RBNZ chief economist Paul Conway says the committee had a set of projections that it runs internally to anchor the conversation. “But we don’t publish those externally because it’s a working set of projections”.

“To get it from there to something that we’d be comfortable publishing would take rounds and iterations so that the committee owns it.”

‘OCR is very conditional on how the economy evolves’

Conway says the world has been in such a state of flux currently and things move quickly.

“I think the message that we’re putting out in this MPR (Monetary Policy Review) is [that] the future path for the OCR is very conditional on how the economy evolves.”

Conway says the RBNZ has put out a framework for how they’re thinking about near-term inflationary pressures and the extent to which they spill over into medium-term inflationary figures and the extent to which that will be offset by a weaker growth environment in New Zealand.

“That will very much condition the rate track going forward. But it is conditional. There are unknowns in that.”

Conway says the RBNZ is getting more information all the time that will make it less conditional. “You know come May, in the first instance, for our MPS (Monetary Policy Statement).”

'Earlier than December'

Following the latest OCR announcement, ANZ chief economist Sharon Zollner says it'll be a highly subjective exercise deciding when the RBNZ should and will start to increase the OCR.

But in our view, the balance of risks is shifting towards the Committee deciding that the hurdle has been cleared earlier than December," Zollner says.

She says the risks look tilted towards the RBNZ deciding increases should start earlier than ANZ economists’ forecast of December. “However, there is a lot of water to flow under the bridge yet."

ASB senior economist Mark Smith says the safest course of action is to wait until more clarity emerges, which is what the RBNZ seems to have done.

"While this looks to be the most prudent course of action, it is not riskless.”

Smith says ASB has revised its OCR outlook and expects “a more timely pace of monetary policy normalisation.”

“We expect 25 basis point hikes in September and December and a 3.25% endpoint by mid-2027 as monetary policy settings are normalised.”

Smith says “the economic and monetary policy outlook is uncertain and there are a lot of moving parts.”

“Moving the OCR earlier reduces the risks of inflation overshooting and will likely mean fewer rate hikes are required over 2027. There are limits to what even the RBNZ can do, and its mandate remains to keep inflation low and stable over the medium term.”

For other economists, the RBNZ's announcement on Wednesday has reaffirmed their early forecasts.

BNZ head of research Stephen Toplis says there was nothing in Wednesday’s MPR that indicates it should change its view that the first rate hike should be in September; “with a series of rate hikes thereafter until such time that monetary conditions move to the tighter side of neutral.”

“While some think we are being overly aggressive with our projections we reiterate that we are only talking about moving modestly through neutral," Toplis says. 

“With the inflationary pressures that are so prevalent we think this represents a relatively conservative stance."

The announcement of a ceasefire in the Middle East does not change BNZ's view, he says.

New Zealand Institute of Economic Research senior economist Ting Huang says the RBNZ’s latest communications reinforce its forecast for an OCR increase in July.

“With the oil shock, disruptions to global supply chains, and evolving global uncertainties, the RBNZ now faces an even tougher balancing act in supporting New Zealand’s fragile economic recovery while containing inflation.”

'No indication of when the Bank might start to raise interest rates'

Infometrics chief forecaster Gareth Kiernan says Infometrics interpreted Wednesday’s statement as relatively hawkish.

"[But] it rightly provides no indication of when the Bank might start to raise interest rates.”

“The Bank will be relying on a mix of survey data, qualitative feedback from businesses, and high-frequency partial data to try and judge whether it needs to start lifting interest rates earlier," says Kiernan.

With the next Monetary Policy Statement on May 27, Kiernan says it might be too soon for the RBNZ to; “make a firm judgment on whether inflationary pressures are becoming more pronounced than it is comfortable with.”

“We currently expect the first interest rate rise to occur at the following review in July, and we have brought forward the timing of this increase as part of our updated economic forecasts,” Kiernan says.