Central bank to announce decision next week
It’s that time of the month again when the Reserve Bank of New Zealand (RBNZ) set to announce its latest official cash rate (OCR) decision – and BNZ economists have something to say.
Last month, the RBNZ kept the OCR at its current level of 0.25% and halted the Large Scale Asset Purchase (LSAP) programme as an improvement in its global economic outlook has convinced it to reduce the stimulatory level of monetary settings to meet its objectives over the medium term.
Following last month’s OCR decision, BNZ research head Stephen Toplis said it was to the RBNZ’s credit that it had “acknowledged the sheer pressure of the recent economic data and its inflationary risks.”
However, in the latest BNZ Markets Outlook, BNZ economists noted that the New Zealand economy is “stretched to bursting,” the country is at or through maximum sustainable employment, and inflationary pressures are rising almost exponentially. As a result, BNZ economists forecast a 25-point rate hike on August 18, 2021.
“This is not a criticism of the RBNZ’s forecasts. But what it does show is that there is no reason for the cash rate to be kept at 0.25%. Not only has Armageddon been avoided, but the reality is the economy (with the notable exception of some industries) is on fire,” the BNZ economists said.
“Demand is simply greater than supply. While supply issues are as much (if not more) to blame than demand, central banks can’t do much to affect supply. So, the default must be to do whatever is necessary to rein in demand.
“Given the extent of the pressures that persist, one could easily argue that monetary conditions should be tighter than neutral now but, practically, and given the risks that abound, the tightening will have to accumulate over time rather than coming all at once.”
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Currently, annual CPI inflation in New Zealand sits at 3.3%, while core inflation (depending on the measure used) is at, or above, 2.0%. As a result, BNZ economists forecast a 4.1% CPI inflation for the September 2021 quarter, with upside risk.
“Headline inflation is expected to remain above 2.0% for the foreseeable future, even with the interest rate increases we have suggested. In support of this hypothesis, inflation expectations are rising, and business pricing intentions are at record highs. The unemployment rate is 4.0%, and set to fall further,” the BNZ economists added.
The economists also reported that the underutilisation rate is falling, Labour market shortage indicators are at record highs, and Labour Cost Index inflation is above 2.0%.
“All the above says ‘get to neutral as fast as possible.’ The RBNZ has concluded that neutral is probably somewhere of the order of 1.9%,” they continued.
“Taking all this into consideration, we thus reaffirm our forecast that the RBNZ raises the cash rate 25 basis points, to 0.5%, at its August meeting.
“We are expecting rate increases at each of the subsequent three OCR decisions. This takes the cash rate to 1.25% by February 2022. We currently forecast a peak of 2.25% by February 2023. It goes without saying that these expectations will be under constant review.”
