The bank expects the cash rate to peak at 5.25%, not 5.5%, but thinks RBNZ "should" stop at 5%
Kiwibank is expecting the Reserve Bank of New Zealand to make a relatively straightforward 0.25% hike this Wednesday, lifting the cash rate to 5%, then make a “pivot” in May.
In a Kiwibank publication, Jarrod Kerr (pictured above left), chief economist, and Mary Jo Vergara (pictured above right), senior economist, said this week’s policy decision is a “stepping stone between the MPS in February and May,” with the language to focus mainly on the fight against inflation.
“Inflation is still running above 7% and will take some time, possibly a year, to return to the RBNZ’s target range of 1-to-3%,” Jerr and Vergara said. “Imported inflation (tradables) is likely to ease quite quickly. Global growth is losing momentum. And commodity prices may fall further this year. But domestically generated inflation (non-tradables) may prove to be frustratingly sticky.
“The impact of recent flooding and the cyclone is likely to be inflationary. The clean-up and rebuild effort is likely to come in well above $10bn.
“And the construction industry is already running at full capacity. We had seen some signs of a significant slowdown in construction activity, however. The pipeline of work, particularly in residential construction, was starting to evaporate before the weather events struck the North Island.
“Building consents peaked early in 2022 and continue to fall with a housing market in retreat. The monthly number of new homes consented in Feb was down 9% (seasonally adjusted). However, with thousands of homes needing to be rebuilt, we may see consents tick higher in the impacted regions. The repair of damaged infrastructure will also see the construction pipeline swell in coming months.
Kiwibank said there was some clear evidence that the rapid rate hikes were working.
“Both business and consumer confidence have dropped into recessionary territory, and economic activity contracted in the final quarter of 2022,” the economists said. “Business investment intentions are downbeat, and we have seen a sharp drop in employment intentions.
“Many projects that would have gone ahead this time last year, are no longer viable with today’s interest rates. We are starting to hear more and more anecdotes of firms downsizing their workforce. It’s the beginning of a softening in the labour force, with the unemployment rate likely to rise from near-record lows. The RBNZ is openly engineering a recession to combat inflation. And that involves a lift in unemployment.”
Kiwibank predicted the cash rate to peak at around 5.25%, which basically means another hike in May, before rates begin to fall to hit 4.5% by the end of 2024 – a pricing the economists said RBNZ will not agree with.
“We think the RBNZ will try to guide pricing higher, by partially removing thoughts of imminent rate cuts. We think this week’s statement will try to provide a steady hand, and shut down thoughts of early rate cuts.”
Kiwibank is expecting the central bank to “pivot” in May.
“We suspect the economic data will have turned enough to justify an end to the tightening cycle,” the economists said. “The RBNZ risks delivering too much tightening, after doing too much easing during the heights of the COVID pandemic. What we think the RBNZ should do – stop tightening now – is less than what we think the RBNZ will do. But that’s hopefully changing. We now expect the RBNZ to hike to 5.25%, not 5.5%. Although we think they “should” stop this Wednesday at 5%.”
In what would be an “interesting contrast,” Kiwibank said it expected Australia’s central bank, which will make its cash rate call prior to RBNZ, to hit pause on interest rate hikes, ending a run of 10 straight increases at 3.6%.
“Inflation in Australia is slowing. Last week’s CPI print slowed by more than expected, down from 7.4% yoy to 6.8%,” Kerr and Vergara said. “There are also clear signs that economic growth is weakening with modest household consumption. Slower inflation and economic growth afford the RBA with the option to pause and assess the 350bp of tightening. 350bp of tightening delivered in under a year is a lot.
“But compared to the RBNZ’s 450bp of hikes so far, the RBA has done much less. The RBA was among the last (developed) central banks to start tightening. Now, they’re among the first to stop (behind the Bank of Canada). The Aussie 2s10s govie bond curve looks straight out of a textbook, maintaining an upward slope.
“The Kiwi curve however remains inverted, with further rate rises signalled and expected. Only time will tell who gets it right and another set of bragging rights.”
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