Economists expect "firm guidance" from RBNZ
Kiwibank economists are expecting the Reserve Bank to make a surprise move again this week, following the 50bp hike in April.
In Kiwibank’s latest publication, Jarrod Kerr (pictured above left), chief economist, and Mary Jo Vergara (pictured above right), senior economist, said RBNZ will most likely deliver a 25bp hike to 5.5%, but that what’ll be more interesting than this week’s OCR decision is the forward guidance.
“We will all ask the same question: is 5.5% the peak in this cycle? It should be,” Kerr and Vergara said. “And we still believe it will be. But it’s too early for the RBNZ to come to that conclusion (unfortunately). The data has clearly turned in the RBNZ’s favour. But the RBNZ will remain hawkish. Because they want to see inflation comfortably back within the band. And that will take time, at least a few quarters. So, we expect firm guidance.”
The economists said the central bank’s forward guidance may do two things: highlight the risk of further tightening, if needed, and look to remove (postpone) rate cut expectations.
“Monetary policy works with long lags,” they said. “It takes at least 9-to-18 months for the mortgage book to roll off rates set long ago. We are still feeling the impact of RBNZ rate rises from last year. It is the lagged impact of monetary policy that has us concerned the RBNZ is hiking too far.”
That said, Kerr and Vergara noted the few inflationary forces complicating the outlook.
“The (growing) inflationary impulse coming from the cyclone rebuild is one,” they said. “The other is higher net migration. Huge waves of net migration have huge impacts on the economy. More people generate more demand, for everything.
“We need more houses, more infrastructure, and more spend on education and health. We are already seeing tentative signs of recovery in the housing market, as migrants play a larger role. And all of that (extra demand) means more inflation. Net migration booms are generally seen as a net-positive for demand and therefore inflation.”
The economists said they don’t think the migration boom is enough to justify further rate hikes.
“Most of the recent spike in migration is pent-up demand,” they said. “Migrants who would have come here over the last few years, but couldn’t due to COVID border restrictions, are coming now. We think migrant flows will naturally fall back. And if they don’t, we’d expect to see tighter restrictions from government.”
Another thing complicating the outlook, Kerr and Vergara said, was the government’s budget, which was less contractionary and more expansionary.
“More government spending, the cyclone rebuild, and the spike in migrants reduce the chance of a recession,” they said. “But the trio of forces also point to a higher inflation trajectory. The upside risks to inflation will concern the RBNZ, and we cannot rule out further rate rises beyond 5.5%, or a 50bp move on Wednesday.”
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