The bank "reluctantly" forecasts another 25bp rise in May
It would have been better for the Reserve Bank to raise the OCR by just 25 basis points, according to BNZ economists, as they flagged further rate hikes should labour market conditions and inflation not move in the desired manner.
On Wednesday, RBNZ delivered a shock 50-basis-point hike, which took the cash rate to 5.25%, contrary to market expectations of a 25-point rise, sparking fairly widespread concern and criticism of the move as possibly being too much.
Stephen Toplis (pictured above), BNZ’s head of research, speculated that the RBNZ decision “had very little to do with economic conditions” and more with the falling global interest rates that had driven New Zealand wholesale rates lower, interest.co.nz reported.
“There was no need to go like a bull at a gate at this juncture. This is not the start of the tightening cycle,” Toplis said.
The latest RBNZ hike has pushed the OCR up by some 500 basis points since the start of this tightening cycle in October 2021 – an unprecedented rate of increase that drove the OCR to heights not seen for 14 years, when the OCR was starting to rapidly descend in the wake of the Global Financial Crisis.
“One of the things the Reserve Bank is supposed to take into consideration is that its actions do not generate unnecessary volatility in financial markets and the real economy,” Toplis said.
He believed the approach taken by the central bank “will most definitely generate heightened volatility in both.”
Toplis said BNZ economists were “bamboozled” as to what to forecast for the May OCR meeting.
“We think the RBNZ has done more than enough to impact the things that it can impact,” and had believed that before Wednesday’s “bombshell,” he said.
“On that basis, we are strongly tempted to stick with our view that the cash rate peaks at 5.25% and, hence, assume rates are unchanged at the May meeting,” Toplis said. “But will the RBNZ get the data it needs to be comfortable doing this? We think not.”
BNZ economists are forecasting that in the CPI inflation release due out on April 20, the quarterly rise will be “at least as big” as RBNZ’s estimate of 1.7%.
“Moreover, with petrol prices now again in the ascendancy it looks like most folk, including the [RBNZ], will be revising upward their Q2 CPI expectations," Toplis said, although he added that higher inflation outcomes “may already be baked into” the latest RBNZ decision.
He said the latest labour market data will be released on May 3 and “there is a reasonable chance” the labour market remains tighter than RBNZ has forecasted albeit that wage growth might not be.
Following that, on May 18, the government will release its budget.
“Who thinks there will be no fiscal slippage in this? To start with, revenue is already slipping, meaning that this (and next) years’ operating balances are likely to be ‘worse’ than currently built into the Reserve Bank’s forecasts,” Toplis told interest.co.nz.
“You can then add on some spending associated with the cyclone relief. Of course, there is also the widespread view that the government will deliver a typical election year budget. It might but we think that the minister of finance will contain this as much as is possible given that he fully understands how the Reserve Bank would respond to any further stimulus. Some slippage is still likely.
“Taking all things into account we thus, reluctantly, forecast that the RBNZ will raise the cash rate a further 25 basis points at its May 24 MPS [monetary policy statement] taking the cash rate to its final resting place of 5.5%.
“We say ‘reluctantly’ because we think the bank has already done more than enough. Our fear is that if the RBNZ sticks dogmatically to focussing more on the actual data than the leading indicators that it might continue to surprise on the upside.”
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