Worrying signs for RBNZ as economists change OCR forecasts
A number of economists from major banks have changed their official cash rate predictions in light of inflation data which was released on October 18.
The economists from ANZ,. Westpac and Kiwibank are predicting further increases to the Reserve Bank of New Zealand’s official cash rate in order to reign in the inflation target in 2023.
The 7.2% CPI increase announced on Tuesday follows an annual increase of 7.3% in the June 2022 quarter and an annual increase of 6.9% in the March 2022 quarter.
Westpac NZ senior economist Satish Ranchhod (pictured above left) said the latest inflation data was above its forecast and RBNZ’s expectations.
Read more: New inflation figures released
“While there were some unusual price movements (like very large increases in airfares), underlying inflation pressures remains strong. Importantly, core inflation is not showing signs of easing – in fact it’s pushed higher,” Ranchhod said.
“Pressures are widespread across domestic and imported prices and this result adds to the upside risk for the official cash rate as underlying inflation pressures are yet to show signs of easing despite the sharp rise in interest rates over the past year.”
Ranchhod said this result was well above the RBNZ’s latest published forecast.
“The RBNZ’s forecast was finalised in August and it’s likely that the RBNZ had revised up its forecast since that time. Even so, we suspect that this result will have been a large upside surprise for the central bank, adding to the upside risks for the OCR,” he said.
“But underlying the large price rises in those specific areas, we’re seeing inflation running red-hot across the economy, with particular strength in housing-related costs.”
Ranchhod said this result offered no respite for the RBNZ.
“Underlying inflation pressures in the economy are running red-hot. Those pressures are widespread across the economy, including large increases in the domestically oriented components of inflation,” he said.
“Inflation pressures are not showing signs of easing despite the sharp rise in interest rates over the past year. We’re forecasting 50bp increases at both the November and February policy meetings, which would take the OCR to 4.5% in early 2023, its highest level since 2008.”
Read more: Annual inflation tipped to fall from peak
ANZ chief economist Sharon Zollner (pictured above centre) said ANZ had changed its OCR call and now expects the RBNZ to hike the OCR by 75bp in both November and February before stopping to take stock.
“This takes the OCR to a peak of 5% by February (previously 4.75% by May). Both hikes are contingent on global financial markets keeping it together,” Zollner said.
“Such large moves so late in the cycle are risky, no question and could well turn out to be a mistake. But Tuesday’s data gives the RBNZ little choice because they are further behind the inflation game than thought.”
Zollner said inflation remained far too strong in the September quarter with consumer prices lifting 2.2% in the previous three months.
“While there were some big movements in volatile components of the CPI, prices across the CPI generally lifted by more than expected, which was reflected in core inflation measures continuing to rise,” she said.
“Inflation retaining at 7.2% is alarming enough, but the details of the data confirm that underlying inflation didn’t just remain strong, but actually continued to increase in the September quarter.”
Zollner said housing related costs (28.3% of the CPI basket) were once again a key driver in this outcome.
“Rents lifted 1.0%, council rates were up 7.3% and construction costs lifted 3.3% in the quarter,” she said.
“While cost pressures in this group have been intense in recent months, there are some signs that a reduction in inflation pressures is due.”
ASB Bank has also shifted its interest rate predictions following the latest CPI inflation data.
“We have changed our OCR call to now have a 75bp hike in the November Monetary Policy Statement and with two 50bp hikes in February and April 2023,” said ASB senior economist Mark Smith (pictured above right).
“With the RBNZ potentially moving in large amounts for a sustained period of time, there is obviously uncertainty around the eventual end point. But for the time being, RBNZ urgency is likely to be heightened.”
Smith said the latest CPI outturn confirmed fears the bank had over a sizeable bow wave of domestically generated inflation as annual non-tradable inflation was likely to remain elevated for longer.
“The upshot is that based on current monetary policy settings, annual CPI inflation is unlikely to fall under 3% until well into 2024,” he said.
“Linked to this is the extraordinarily tight NZ labour market, with our research pointing to the risk of high inflation rates persisting for longer.”
Smith said the labour market indicators pointed to continued hiring at a time when the working age population was growing at around 30-year lows, with its research suggesting low labour supply growth was likely to continue well into 2023.
“That should keep the NZ labour market extremely tight and keep annual non-tradable and core inflation elevated, unless spare capacity in the labour market opens up,” he said.
“In short, there should be little that should dissuade the RBNZ that further action is needed. There were also few signs that the cooling housing market is starting to drive down housing-related consumer price inflation and hence, the overall domestic inflation pulse. There is a long way to go, but signs to date don’t look good.”
