The big bank expects the Reserve Bank to carry through with its plans in the near term
Westpac is now expecting the cash rate to peak to 5.5% this year, up from its earlier forecast of 5.25%, after the Reserve Bank of New Zealand recently made a well-anticipated 50 basis point hike.
In its review of RBNZ’s February 2023 Monetary Policy Statement, Westpac economists noted that the bank remains determined to get ahead of inflation, and sees the risks as the upside of its already strong forecasts.
RBNZ continues to expect the cash rate to peak at 5.5% in mid-2023, and stay there until late next year.
“When a central bank has something in mind, they’re quite likely to do it, at least in the near term,” said Michael Gordon (pictured above), Westpac acting chief economist. “And we suspect that there won’t be enough in the upcoming data to persuade the RBNZ otherwise – not least because some of it will be impacted by Cyclone Gabrielle, rendering it less useful for gauging the strength of demand in the economy.”
Westpac is expecting RBNZ to lift the OCR by 50bp at the April review then by a final 25bp in May.
And while RBNZ appeared confident about the near-term direction of monetary policy, it is clearly grappling with some big uncertainties, even before considering the impact of the cyclone.
“On the inflation side, it still sees the risks as more to the upside – and that’s over and above their already very strong inflation forecasts for the year ahead,” Gordon said. “The RBNZ expects the annual inflation rate to tick up to 7.3% in the March quarter, and only slowing as far as 5.3% by the end of this year. The longer that inflation remains high, the greater the risk that it becomes embedded in price- and wage-setting decisions in the years ahead.”
RBNZ also recognises, however, the downside risks to activity in the coming years, as higher mortgage rates put a strain on household budgets.
“Mortgage rate fixing means that homeowners have been exposed to higher interest rates gradually, then suddenly,” Gordon said. “It’s really in the months ahead that the tightening cycle that began in October 2021 will have its greatest bite. That bite could prove to be more effective in slowing consumer spending than the RBNZ has given it credit for.”
Westpac economists said they continue to differ with RBNZ when it comes to the timing of OCR cuts.
“Mortgage fixing means that it will take some time just to stabilise the average rate that homeowners are paying, let alone provide some relief as the economy cools off,” Gordon said. “The RBNZ’s proactive approach should extend to thinking about the appropriate time to start taking its foot off the brake.”
Westpac said it expected Cyclone Gabrielle to add to medium-term inflation pressures at the margin, although it is still too early to tell the scale of the impact at this point.
“The recovery effort will draw on the nation’s resources for an extended period; the implications for monetary policy are certainly not zero, it’s just a matter of gauging the appropriate degree,” Gordon said.
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