Risks appear to be more balanced for the time being
ASB Bank has released its latest weekly review of the market as the Reserve Bank of New Zealand (RBNZ) seemed to be directing towards the lifting of the official cash rate if inflation pressures ended up being stronger than what was initially expected.
“We ourselves had, in contrast, been comforted by signs that recent inflation data showed a slightly faster decline in reported inflation,” said Nick Tuffley, ASB Bank’s chief economist (pictured).
“We had felt the risk to our forecast of OCR cuts from February 2025 was becoming tilted to slightly earlier than 2025, but the risks look more balanced for the time being given the RBNZ’s current stance.”
The RBNZ’s cautious stance was attributed to it forecasting that the OCR will linger 40-50bp higher for the majority of 2025 and 2026 in relation to the forecast in its statement in August as well as the reserve bank’s concern that the net migration flows were having a more noticeable impact on demand, which was geared towards housing.
“In the short term we still see inflation as having the potential to come in slightly lower than the RBNZ’s forecasts,” said Tuffley.
“If that happens, the RBNZ should remain mollified a bit longer. But it is clearly worried that the impact of the sharp lift in migration flows is showing up as more than just a beneficial supply boost,” he said.
Tuffley said that migration flows appeared to have a milder inflationary impact and that pressures on the labour market are easing quicker than expected.
“The upcoming tests of the RBNZ’s position are Q3 GDP on 14 December and the fiscal update that is also due before Christmas,” Tuffley said.
“Beyond that, ahead of the February Monetary Policy Statement the RBNZ needs to see wage growth and inflation continue to decline as fast as it has most recently forecast. The stickiness or otherwise of non-tradable inflation – and the influence of wages – will be important for how long it takes headline inflation to get back into the 1-3% target band.”
With Q3 partial data such as terms of trade, building work put in place, and various business indicators were set to be revealed this week which will help in shaping GDP predictions, Tuffley said that the GDP was expected to grow by 0.6%.
“Although that would be pretty flat in per-capita terms,” he said.
