The Reserve bank (RBNZ) is still engineering a policy-induced recession. While it’s going to hurt some households more than others, economists hope the slowdown will turn the tide on domestic inflation, and set the broader economy on a more sustainable path over the longer run.
Westpac senior economist Michael Gordon expects an OCR rise to 5 per cent on Wednesday to remain there for the following year.
As inflation pressures recede, Gordon says, Westpac’s economics team sees scope for an extended series of rate cuts in 2024 and 2025, by more than the market is factoring in.
“The RBNZ’s response to inflation is now well advanced and has finally reached a level that the RBNZ considers to be contractionary. There are some early signs that this is having the desired effect, and that demand in the economy is starting to cool off.”
He says even so, there is a lot of water to go under the bridge before economists can be confident inflation is coming back under control. “Firms are still facing a range of cost increases, workers are still in short supply and the upward pressure on wages remains strong.”
The end of the RBNZ’s tightening cycle is creeping a little closer, says Nick Tuffley, ASB’s chief economist.
If there is a 25 basis points rise on Wednesday it will take the OCR to its highest level since 2008, marking a massive 475bp cumulative increase since late 2021.
“The task of getting sufficiently on top of inflation isn’t quite finished. ‘Just’ 25bps is not a done deal,” says Tuffley.
However, there does not look to be as much urgency for the RBNZ to continue to tighten at pace as OCR settings are actively slowing the economy (rather than speeding it up), with recent cyclone impacts and global financial market jitters adding to the highly uncertain outlook, he says.
“What’s more there are further lagged impacts from monetary policy in the pipeline that should slow the economy further and hopefully cool inflationary pressures.”
Local data since the February Monetary Policy Statement has not convincingly tilted things in either direction, says Sharon Zollner, ANZ Bank chief economist.
“Global financial sector wobbles suggest a degree of caution is appropriate, which the RBNZ can now afford given it is fairly confident the OCR is now in contractionary territory.”
She says, however, that ANZ merchant card spending data remains stubbornly resilient; building consents continue to ease; rising net migration could be substantial; cyclone impacts are resulting in higher food prices; the current account deficit hit a ‘hairy’ 8.9 per cent of GPD; and dairy prices have fallen.
“A bit of a mixed bag, on the whole not in aggregate, making any compelling case to deviate from the plan that was outlined by the RBNZ in February: to keep on hiking to 5.5 per cent.”
BNZ senior economist Craig Ebert still believes the economy will enter recession this year.
For now, we maintain our view that the RBNZ will push through two more 25-point hikes, delivering a peak of 5.25 per cent.
“Until recently, this was a non-consensus view. If anything, the balance of risk is starting to shift to an even lesser peak. The recent warning signs from the international financial sector play to this – to the extent they suggest lower inflation pressure ahead, that is.”
Most of the March ANZ survey activity-type indicators are either below normal, or well below normal.
However, Ebert says the survey’s inflation gauges were still miles above levels consistent with annual CPI inflation getting down to the top of the 1-3 per cent target band, let alone the middle of it.
“The longer they hover like that, the more it will test the RBNZ’s flexibility of approach,” he says.
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