Inflation slowing but still problematic, they say
Kiwibank economists have predicted the Reserve Bank will maintain the cash rate at 5.5% tomorrow but said it’s all about the outlook and the fresh set of forecasts, which will likely see some minor tweaks.
In the latest Kiwibank publication, the economists said they remained of the view that the central bank “has done more than enough” to cool the economy and drive inflation back down to their 2% target midpoint.
“We have seen a contraction in economic activity, and we’re likely to see a few more contractions,” said Jarrod Kerr, Kiwibank chief economist. “The economy has been weakened by the rapid rise in interest rates, and the correction lower in house prices.
“Monetary policy is working well, with significant lags. 40% of all outstanding mortgages are rolling off low interest rates in coming months. The pain being inflicted on Kiwi households is ongoing and set to intensify. As a result, we expect to see further falls in consumption, as consumer confidence remains depressed.”
The Kiwibank economists said RBNZ faces a high hurdle for interest rate hikes and that the data so far, do not suggest the need to tighten further.
“The economy is evolving largely as per the RBNZ’s forecasts in May,” Kerr said. “If anything, much of the data have surprised to the downside of expectations – albeit not materially. Nonetheless, a few tweaks here and there to the previous projections are likely to account for a slightly weaker starting point. But we are not expecting an overhaul of the May forecasts.”
With inflation slowing but still problematic, Kiwibank economists said they will be on the lookout for signs of a slight softening in the RBNZ’s tone on Wednesday – “although it is clearly too early to declare any sort of victory on the inflation front.”
“Thoughts of further rate hikes should (hopefully) be squashed,” Kerr said. “And in doing so, we should see the 13bps of rate hikes currently priced evaporate. Our first chart plots the market pricing (blue line), which has a peak in the cash rate at 5.63%. We should see this ease towards 5.5%.”
Kiwibank’s forecast OCR track (light green) is well below that of RBNZ and the market. While RBNZ is expecting rate cuts by late 2024 and the market by mid-next year, the NZ-owned bank has pencilled in the first rate cut in February, saying rates should be marked lower in the first half of the year.
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