Statistics to be released this week should give a clearer forecast
Stats NZ is releasing its Q2 labour market statistics this Wednesday, and economists are watching with interest to see if the figures will point towards an Official Cash Rate hike sooner rather than later.
ASB senior economist Jane Turner said that if the Q2 labour market stays visibly strong, this will “clear the path” for the Reserve Bank to start raising the OCR later this month. She said that given inflation pressures, it will also want to “get in front of the wage/price spiral” and step away from emergency settings as soon as possible.
“From the Reserve Bank’s perspective, it will be looking for confirmation that the labour market is at, or very close to, maximum sustainable employment,” Turner said.
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“This should clear the path for the RBNZ to start returning the OCR to pre-COVID levels, and we expect the first move to be later this month.”
“The economy is at capacity, though capacity is lower than what it would otherwise have been if it weren’t for COVID-19, and inflation pressures are set to build rapidly over the coming year,” Turner explained.
“The lessons from the 2004-2007 tightening cycle is that if inflation pressures get ahead of the central bank, then it ends up lifting interest rates by even more than would have been the case if it had acted sooner. Much like our lesson from containing COVID-19 infections, a hard and early approach can prevent a longer, more painful lockdown later on.”
Turner said that the market has an August rate hike 65% priced in, with more hikes expected in November and in mid-2022.
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Westpac acting chief economist Michael Gordon said that unemployment statistics have been the big “surprise” throughout the pandemic, and is expecting that to continue to be reflected in Wednesday’s data.
“Unemployment has been one of the real surprises of the economy’s response to the COVID shock,” Gordon said. “Early predictions of a sharp rise in unemployment proved to be well wide of the mark, and after that, neither the end of the wage subsidy nor the loss of overseas tourists during the summer period proved to be a barrier to recovery.
“If this week’s data does turn out as strong as we expect, that’ll likely give the Reserve Bank more confidence that it’s time to start withdrawing some of that stimulus by raising interest rates.”
