Economist says there are "two added flies in the inflation ointment"
ASB economists are now expecting the Reserve Bank to lift the cash rate by a final 50bp on May 24 to 5.75% and flag the risk of a further hike, following the government’s announcement of its spending plan.
In ASB’s latest economic note, Nick Tuffley (pictured above), chief economist, said inflation has already peaked and lagged monetary policy impacts are yet to come through, although there are “two added flies in the inflation ointment” – fiscal pressures and the uncertain inflation impact of migration.
“The recent budget opens up the fiscal taps more than what we had expected, notwithstanding the given of added disaster recovery spending,” Tuffley said. The fiscal impulse (impact on economic growth from the fiscal stance) is now set to be quite stimulatory at a time when the RBNZ is still trying to lean against inflation.
“Furthermore, the future path of the OCR is going to depend a lot on how migration flows evolve and how the RBNZ assumes they will influence inflation. Reported net inbound migration has been strong and revised up, changing the picture considerably in a short space of time. There will be a lot more people available to work, relieving acute labour market pressures quicker. But that also means a lot more people who will spend and need somewhere to live. The orthodox thinking on migration is that, overall, it adds to inflation pressure.”
Although ASB economists aren’t convinced that the surge in migration will add to inflation pressure, particularly as labour shortages have played a significant role in boosting recent inflation pressures, they said, “it’s the RBNZ take that matters.”
“Watch for whether the RBNZ sees migration as overall reducing inflation pressures – or boosting them,” Tuffley said.
ASB economists said a 50bp hike is not a done deal, and that RBNZ could still do a “hawkish” 25bp lift.
“Market pricing of the OCR is already roughly 50:50 between a 25bp and 50bp increase in May and is pricing in an OCR peak above 5.75%,” Tuffley said. ‘At the margin that could further tip the RBNZ to a 50bp hike to prop up term rates: market pricing of OCR cuts is premature in the RBNZ’s eyes. The statement and subsequent media conference are likely to be very clear that high interest rates will need to be sustained for some time yet.”
Use the comment section below to tell us how you felt about this.
