The new forecast makes it an outlier among economists
Many economists expect either a negative or flat official cash rate (OCR) in the near future. However, economic research firm Capital Economics expects three OCR hikes by 2023, making the rate 1% by the middle of 2023.
It previously predicted that the OCR would increase from 0.25% to 0.5% by the end of 2022. However, it now expects three OCR hikes by 2023, making the OCR 1% by the middle of 2023. It also expects the Reserve Bank of New Zealand (RBNZ) large scale asset purchases (LSAP) and funding for lending (FLP) programmes by June.
Capital Economics Australia and New Zealand economist Ben Udy said they no longer expect further monetary stimulus despite RBNZ’s “unconstrained OCR” forecast in November hinting further monetary easing in the months ahead. He said the recovery in output occurred much faster than they had anticipated as GDP returned to pre-virus levels in Q3. Most measures of underlying inflation also surged in Q4.
“Third, the housing market in New Zealand is running red hot. House prices are up nearly 20% from a year ago and show little sign of coming back down to earth. The surge in house prices prompted the Minister of Finance to write to RBNZ Governor Adrian Orr suggesting that house prices be added to the Bank’s monetary policy mandate. While the Bank rebuked that suggestion, we doubt Orr would be keen to exacerbate these political tensions by cutting interest rates further,” he continued, as reported by Interest.co.nz.
Udy explained that the forecast of a rapid recovery means they expect a 4.5% decrease in the unemployment rate by the end of 2022, consistent with employment hitting above its maximum sustainable level.
“The Bank’s first step would be to wind down its asset purchase programme, which foresees $100 billion in government bond purchases by June 2022. We suspect the Bank ends purchases around the middle of this year, which would probably mark a total of $60 billion of bond purchases,” he continued.
“We doubt that would cause GDP growth to slow markedly or prevent progress on the Bank’s inflation or employment targets. By the end of 2022, we expect inflation will have been around or above target for nearly two years and that employment should be above its maximum sustainable level.”
