RBNZ's inflation targets analysed
New Zealand is gearing up for a busy end to the month, starting with the Reserve Bank’s (RBNZ) decision next Wednesday.
Unlike April’s short monetary policy review (MPR), the upcoming monetary policy statement (MPS) will provide a thorough update of data and forecasts, including a fresh OCR track.
Kiwibank economists Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured above, left to right) said the focus has shifted from potential rate hikes to the timing of rate cuts.
“The question around monetary policy is no longer ‘will they or won’t they hike?’ but when will they cut?” Kerr, Vergara, and Delgado said.
RBNZ’s current OCR track indicated a 35% chance of another hike, but this risk is expected to be removed next week due to ongoing economic weakness and progress in inflation.
November rate cuts forecasted
RBNZ has indicated that monetary policy must remain restrictive to get inflation back within their 1-3% target band. However, the Kiwibank economists disagreed on the timing, predicting rate cuts to start in November.
“By our forecasts, we see inflation returning to within the RBNZ’s 1-3% target by the September (third) quarter,” they said, making November the earliest feasible date for rate cuts.
Domestic vs. imported inflation
Inflation has fallen from 7.3% to 4.0%, largely driven by a drop in imported inflation, which is now at 1.6%. Domestic inflation, however, remains high at 5.8%.
“Domestic inflation is a slow-moving beast, and it’s the part the RBNZ has most influence over,” the Kiwibank economists said.
Employment data and risks
Employment data for the March quarter was softer than expected, with the unemployment rate rising to a three-year high of 4.3%. Wage inflation also slowed to 3.8%.
“The Phillips Curve is in action,” the economists said, highlighting the relationship between rising unemployment and easing inflation.
Inflation expectations decline
Recent surveys showed a decline in inflation expectations, contributing to reduced price pressures. The RBNZ Survey of Inflation Expectations saw the critical two-year measure fall to 2.33%, the lowest in two years.
“These shifts are a material improvement. Another tick for the RBNZ,” the economists said.
Market reactions and forecasts
Despite RBNZ’s restrictive policy, markets are pricing in rate cuts sooner than the RBNZ indicated. The Kiwibank economists forecast the first 25-basis-point cut in November, with further cuts into 2025.
“The market is getting ahead of itself near term,” they said, expecting the two-year swap rate to hold below 5% for the next quarter and ease down to 4% by year-end.
Economic outlook
The anticipated rate cuts aim to balance the inflation targets and support economic recovery.
“Cutting the cash rate back to more neutral levels will steepen the yield curve," the economists said.
This shift is expected to fuel economic growth and improve household well-being, business expansion, and housing market recovery.
Visit the Kiwibank website for more economic commentary.
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