More is required to bring inflation back inside the 1% to 3% target range within a reasonable timeframe, economist says
The Reserve Bank will need to raise the official cash rate to as high as 6%, in order to bring inflation back to sustainable levels within a reasonable timeframe, according to Westpac economists.
With the OCR currently at 5.25%, the 6% cash rate peak forecast is currently the highest among major banks, with most economists expecting another 25bp hike at the next review next week, bringing the cash rate to 5.5%
In Westpac’s latest publication, Kelly Eckhold (pictured above), chief economist, said “monetary policy is working,” but it won’t be easy to bring inflation back inside the 1% to 3% target range and that more is required to achieve this goal within a reasonable timeframe.
“As a result, we’ve revised up our forecast for the peak in the official cash rate to 6%,” Eckhold said.
Inflation has already been outside the target range almost two years, and our projections indicate it’s going to take another 18 months to get inflation back within the band.”
Annual inflation currently sits at 6.7%, down from 7.2% at the end of last year and weaker than RBNZ’s forecast of 7.3% in the March quarter. But while there were encouraging signs that higher interest rates were translating into weakening inflation pressures, it’s too soon to declare victory over inflation, with a surge in migration having the potential to “disturb the grand plan.”
“The economy likely won’t slow as much as we feared a few months back,” Eckhold said. “Net migration has rebounded faster than expected and population growth is set to rise to its highest level in decades.
“The world is back on the move after a few years of hunkering down, and New Zealand is one of the places where people want to come live and work. New entrants will bring valuable skills and experience to a labour market crying out for workers. But this valuable supply will also bring demand that will offset some of the impact rising interest rates are having.”
As a result, Westpac economists said it’s less likely that the economy will tip into outright recession, and the house price cycle appears to have bottomed out sooner than expected.
“None of this takes away from the point that the interest rate cycle is very mature and the peak in interest rates is near,” Eckhold said. “The extra bit of work we think is required is very much in the vein of a stitch in time saves nine.”
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