With inflation on the up, ASB economists think the RBNZ may now foreshadow future interest rate rises

With inflation on the up, ASB economists think the RBNZ may now foreshadow future interest rate rises

By David Hargreaves

The re-emergence of inflation might prompt the Reserve Bank to next week begin signposting future official interest rate rises, ASB economists say.

The economists have now shifted their own view of when the Official Cash Rate might begin rising, from early 2019 to late next year.

In their latest Economic Weekly the economists say that heading into next week's RBNZ Monetary Policy Statement (on Thursday, February 9), the central bank will have a lot more confidence in the inflation outlook. The economists expect the RBNZ will likely revise its inflation outlook higher.

By the ASB economists' estimates, inflation will now be "comfortably close" to the 2% mid-point of the RBNZ's 1% to 3% inflation target from "fairly early on" in 2017 and persist near 2% thereafter.

The economists say this is a different story from what was earlier expected; that is for inflation staying "still hanging awkwardly close to 1%" for most of this year.

"With the inflation outlook suddenly looking a lot more comfortable to the RBNZ, it will have a reasonable influence on the RBNZ’s thinking around future interest rate movements," the economists say.

In its last MPS release in November the RBNZ forecast a very slight possibility of another cut to the Official Cash Rate. Otherwise, however, the central bank was forecasting that rates would be unchanged till the end of 2019.

The ASB economists say the "downside risks" hinted at by the RBNZ in November, particularly regarding the international situation, now appear to be easily counterbalanced.

"The RBNZ may go as far as foreshadowing next week that the OCR will rise in the long term, shifting from its view in the November MPS..."

In recent weeks there has been a strengthening view in the market that rate rises could actually start as early as this year.

The ASB economists, however, think the local interest rate market "has got well ahead of itself in pricing in a full OCR increase by the end of this year".

"...But we now expect the OCR to start rising by late 2018. That is still some way off, but sooner than the early parts of 2019 we had previously thought."

While the economists say the inflation picture has shifted "quite a bit" in a short period of time, they caution the RBNZ about "rushing" to lift interest rates.

They note that the New Zealand dollar remains stubbornly high and say the RBNZ will need to be careful it doesn’t sound "prematurely excited" about OCR increases, otherwise it risks further fuelling that strength – "as has happened in the past".

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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12 Comments

Surely that'll pour fire on the NZD?

Today's T Bill auction signals a ~ 25bps OCR hike before early 2018 if these funded debt instruments can be considered a price discovery mechanism.

Past official rate changes and currency pair correlations are in dispute if a past central bank experience in another jurisdiction can count as an example.

In the middle 2000’s, both the CPI and PCE Deflator remained well above the Fed’s then-implicit 2% target no matter what Greenspan did or proposed. He raised the federal funds target 17 times in two years, to conspicuously no avail. Instead, the FOMC was left muttering about some “global savings glut” while at the same time discontinuing (rather than researching) the drastically incomplete M3 supply measure, fulfilling Friedman’s warning in the fullest.

Furthermore, the USD index was at a low or near low over the the mid 2004 to mid 2006 period. View graphic evidence (historical,max tabs) Read more

In philosophical terms I keep coming back to is Plato’s allegory of the cave, where he described Socrates talking about the human struggle over the difference between worldly “knowledge” and true knowledge of the philosophers. In Economics, we have been conditioned to believe that it is especially the central bankers who have attained the true knowledge that laypeople cannot comprehend. This is false and in demonstrated (repeatedly) reality totally backwards, as it is central bankers who are stuck trying to decipher what they see as the shadows on the side of the cave and never being able to do so. Read more

I want to see how far RBNZ will push interest rates past breaking point. Then how slow they are to respond when problems become obvious.

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OCR rises shouldn't be a problem for the real estate investment brigade ...

... it's kind of 'like they're a bug , flying down the motorway ... hurtling faster and faster ...

And , coming towards them is the mother of all big rigs , a Kenworth truck with a bad attitude ... representing the OCR rises ...

... now , in the ordinary scheme of things you'd expect the bug to get splattered across that windscreen , sooner or later ...

But that's not how the property investment folk see it at all ... they reckon they can defy history and all laws of physical reality ... they reckon the bug will de-rail the truck ... because , " this time is different " ...

My money is on the American made truck/tank whatever.
see at 2:11 proves it!
https://www.youtube.com/watch?v=a98UX3MuAEg

... that was hilarious , Henry ... but it was the wrong sort of beetle which got crushed ... I was hoping that someone would flatten Paul McCartney once and for all ...

Never have been able to recover from " Mull of Kintyre " ... or " The Girl is Mine " ... or ( shudder ! ) " Ebony & Ivory " ... brrrrrrrrr !!!!

... fire up the tank again , guys !

I know the Mull of Kintyre well from many holidays spent there and it did nothing to deserve the mournful dirge written in its name.
The low point was to wake up on the first morning of our 20th anniversary in a hotel in Paris,to hear it wafting up from a radio in the central courtyard.There's never a gun around when you need one!! (Well,in America there is,but not the civilised world).

What are you dudes smoking...really love the analogues

Just part of the cycle.interest rates go up so should yields.prices come down a bit then hopefully stabilise.the market needs to go back a bit as the rises have been too steep.'

"The economists have now shifted their own view of when the Official Cash Rate might begin rising, from early 2019 to late next year"
A monkey has the same odds predicting the OCR 2 years ahead

Well monkeys do have an advantage. They are the ones setting the OCR after all.

Maybe that's why the banks don't take any notice of it.

Yes trying to set the OCR is like trying to set the price of petrol, we basically have nothing to do with it. We don't own the oil rigs and we don't own the banks anymore so I have no idea why the reserve bank thinks it can control the actual interest rate.