Soaring food prices in the past month have encouraged BNZ economists to tweak their inflation forecasts higher - raising their annual inflation pick as of the end of March 2022 to 6.6% from 6.4% previously.
Statistics New Zealand said on Monday that food prices shot up 2.7% in January - the biggest monthly increase in five years.
BNZ senior economist Craig Ebert said in the latest BNZ Markets Outlook publication that while food prices typically increase in January on seasonal grounds - the 2.7% was far more than seasonal, "and more than the 1.8% we had pencilled in".
December quarter figures released last month showed that annual inflation had hit a three-decade high of 5.9% at the end of 2021.
"...Inflation is pervasive, is the message, Ebert said.
"And it’s likely to persist at uncomfortably high rates, judging by last week’s RBNZ survey of expectations. This showed respondents’ two-year ahead view on annual CPI inflation up at 3.27%, from 2.96% last quarter. This was the loftiest result since the RBNZ began specifying a CPI inflation target, back in the early 1990s. The one-year outlook spiked to 4.4%, while the five-year view nudged up to 2.30%, from 2.17%." [Also, the 10-year ahead inflation expectations pushed up to 2.12% from 1.97%.]
Kiwibank economists in their weekly First View publication said what stood out in the latest RBNZ survey was "the magnitude of the rise at longer [time] horizons".
"Respondents don’t expect CPI inflation to return to the RBNZ’s 2% target mid-point over the survey’s entire 10-year horizon," the economists said.
They said longer forecast horizons are seen as a measure of the respondents’ confidence in the RBNZ’s ability to deliver on its inflation targeting mandate.
"It’s all about credibility."
They said the latest results survey of survey of expectations adds further support to their view that the RBNZ will lift the Official Cash Rate (currently on 0.75%) rate at each review this year to take the OCR to 2.50% by November.
"While current market pricing suggests that market participants are toying with the possibility of a 50 [basis point] hike at the upcoming February MPS, we think the RB will stick with a more measured 25bp hike. At present, risks to the economy are not all one-way. Daily omicron numbers are rising fast and are yet to peak, and geopolitical tensions surrounding Ukraine have added volatility to markets."
The RBNZ has its next review of the OCR on Wednesday, February 23.
Westpac economists in their Weekly Economic Commentary said it is clear there will be a lot for the RBNZ to digest since its last review three months ago.
"On the one hand, December quarter inflation printed even higher than the RBNZ expected, and anecdotes also point to it becoming more persistent," they said.
"That on its own would suggest a need for further monetary policy action. However, early signs that higher interest rates are having a cooling effect on the housing market will be welcome (the sales figures for January will be released on Tuesday). And as the RBNZ noted in November, it’s not clear how households’ spending appetites will adapt to living with Covid in the community – not least because the Omicron wave will be in full force at the time the RBNZ makes its deliberations.
"There’s no question that the OCR has higher to go, with the debate now around the extent and pace of rate hikes. Our view remains for a 3% peak in the OCR by the second half of 2023, which can be reached in a series of 25 basis point steps. However, financial markets continue to price in a high chance of a 50 basis point move at this month’s review, and wholesale interest rates have risen further.
"We suspect the local market is being dragged along by overseas trends, as speculation grows about interest rate hikes in the US and Australia in the near future. But these central banks are more at risk than the RBNZ of falling behind the curve on inflation – the RBA has only just ended its bond buying programme, the Fed is just starting to slow down its purchases, and neither have started lifting their policy interest rates yet," the Westpac economists said.