Central bank is in a "wait and see mode," economists say
The Reserve Bank of New Zealand is expected to maintain the 5.5% official cash rate in July and for the rest of the year, marking the end of an aggressive policy tightening that has already pushed the economy into a mild recession, according to a Reuters poll.
RBNZ is probably in a “wait and see” mode after its 20-month long hiking cycle has taken its OCR up 525 basis points up to a 14-year high – the highest among its developed market peers.
The economy is predicted to further soften as the impact of the 12 rate hikes are felt. But with inflation currently sitting at 6.7%, it was still running at more than double the central bank’s 1% to 3% target range.
The 25 economists polled by Reuters all predicted that the RBNZ would hold the OCR at 5.5% on July 12, which would be the first time the central bank has not lifted rates at a policy meeting in two years.
RBNZ hiked rates in May but signalled it was done tightening.
“In the May statement, they gave us a crystal-clear OCR track,” said Jarrod Kerr (pictured above left), chief economist at Kiwibank. “Only a few commentators out there can't seem to figure it out, but it's just a flat straight line that goes well into next year. That will not have changed.
“That last move was a signal that they’re pausing from now and part of that is the fact the economic data has come in below their own forecast... there’s nothing really else for them to say other than ‘we’re waiting, we’re watching.’”
New Zealand’s major banks – ANZ, ASB, BNZ, Kiwibank and Westpac – were all expecting no rate move on Wednesday, in line with the market pricing.
More than 90% of the economists polled predicted no changes to rates this quarter, while the remaining percentage was expecting a 25-basis-point hike by the end of September.
Median forecasts showed rates being held steady at 5.5% until the end of the first quarter next year. Three of the 24 respondents said at least one 25bps cut this year was likely – that’s down from about one-third of the sample forecasting that move in a May poll.
“We do think the RBNZ has done enough. But the risk over the next few months is that inflation pressures reduce too slowly for the RBNZ's liking,” said Nick Tuffley (pictured above right), chief economist at ASB. “Furthermore, the RBNZ is unlikely to start cutting interest rates soon.
“Over the past couple of months, other central banks have had to up their tempo. Over the rest of 2023 the more likely risk is that the OCR goes up slightly further if the decline in inflation starts to look drawn out.”
Meanwhile, 16 of 22 predicted at least one 25bps rate cut in the second quarter of next year, roughly around the time inflation was expected to return within RBNZ’s target range.
Economists predicted inflation to average 5.3% this year before dipping to 2.9% in 2024, slightly higher than the 5.1% and 2.6% forecast in an April survey.
New Zealand’s economy entered into a mild recession in the first quarter, but analysts said it will likely increase 0.7% this year and 1% in 2024, Reuters reported.
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