The RBNZ seems highly likely to lift rates by 25bp in May, but the budget details will matter, economist says
The government is expected to deliver a “no-frills budget” this week, but ASB economists said this may not be enough to deter the Reserve Bank from hiking rates.
In ASB’s latest publication, Mark Smith (pictured above), senior economist, noted that the government has been warned by the RBNZ that a profligate fiscal package will be countered by even higher interest rates.
But with recent government announcements of a “no-frills budget” with a strong focus on supporting Kiwis struggling with cost of living, recovery and resilience, and fiscal sustainability with no new major taxes of any significance, Smith said to “expect the messaging to be tailored towards a few key priorities.”
“The weaker economic outlook relative to the Half Year Economic and Fiscal Update (HYEFU) 2022 forecasts and the hit to the public finances from recent storm damage are expected to reduce fiscal balances and slow the forecast improvement in Crown debt,” he said. “This will be tempered to some extent by the $4bn reprioritisation of spending that should see government spending decline as a share of GDP.”
Although the return to an OBEGAL (operating balance before gains and losses) surplus will still be earmarked, this could be a year or two later than previously forecast.
“Nonetheless, the government’s two fiscal rules [surplus rule and net debt rule] should continue to be comfortably met, with the books returning to an underlying fiscal surplus before too long, and with net public debt peaking well below 30% of GDP and declining as a share of incomes by the end of the forecast horizon,” Smith said. “The gross bond tender is expected to be around $10bn higher out to 2026/27.”
For markets, the focus will be the size of the bond tender (slightly higher than HYEFU22) and the fiscal impulse (still contractionary).
“The worry for the RBNZ could be that this contractionary fiscal stance will not be sufficient to cool demand and inflationary pressures in the current environment of strong demand for government services in a high-cost environment,” Smith said. “The RBNZ seems highly likely to follow through with a 25bp hike in May, but the budget details will matter.”
Click here for the full ASB report.
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