Bank economist explains current forecast
Failed banks Silicon Valley Bank and Signature Bank have spiked concern across the globe, but they are unlikely to result in a pause in interest rate hikes, a leading bank economist says.
The Reserve Bank is set to review the wholesale cash rate in April, and ANZ is forecasting a further rise.
Reserve Bank Governor Adrian Orr said in the monetary policy statement media conference in February that while there were early signs of price pressures easing, core price inflation remained too high. Given current growth rates, Orr said that the RBNZ was expecting the economy to contract by around 1% over a nine-to-12-month period, noting that it was “still projecting a recession”.
ANZ chief economist Sharon Zollner (pictured above) told NZ Adviser that the collapse of the two US banks earlier this month had not shifted the bank’s core forecast, confirming that ANZ continued to forecast a 0.25% cash rate rise in April.
“We were seeing [the cash rate increase] at 0.25% and it was very much a case of watch the data … in my view, it is a good reason to go 0.25% rather than 0.50%,” Zollner said.
Noting the official cash rate had gone up 350 basis points over 16 months, Zollner acknowledged that interest rates had gone a long way over a short time. Although the Reserve Bank is considered by some to have already done too much, rate hikes take time to flow through, she said.
GDP fell 0.6% over the December 2022 quarter, Statistics New Zealand figures showing activity in nine out of 16 industries decreased. Manufacturing was the biggest driver of the quarterly GDP fall, while household spending remained flat.
Zollner said the bank’s take on the December GDP numbers was that the -0.6% fall overstated the slowdown, meaning it was not a useful indicator of current demand in the economy.
December’s GDP fall followed a very strong September quarter (1.7%) and stemmed from capacity constraints over a typically busy last quarter, she said.
“If you’ve got capacity constraints like labour shortages, then in quarter four there can be a lot of activity foregone … that’s when agriculture, construction, tourism, retail and hospitality peak,” Zollner said. “That’s when labour shortages would hurt growth the most.”
She noted that other indicators, such as consumer and business confidence, and retail spending data showed that demand was definitely cooling, and that monetary policy was working.
“It does take time and the Reserve Bank’s quite reasonable fear is that inflation is becoming normalised in people’s expectations,” she said.
Zollner said that inflation expectations had become more ingrained, making the Reserve Bank’s job “tougher”. Expectations flow through to areas such as wage growth, the ease of passing on higher costs by way of price rises and the perception of a “good mortgage rate”.
“As inflation stayed around 7.2%, its actually broadened … rather than a few things increasing a heap, it’s almost everything increasing quite a lot,” she said.
ANZ forecast for cash rate peak
In addition to a 0.25% rise in April, ANZ is forecasting a further 0.25% in May, taking the official cash rate to 5.25%.
“That’s got to be conditional now on financial markets holding it together,” Zollner said.
In response to when the interest rates may start to decline, Zollner said the bank had not yet forecast interest rate cuts, mainly because it viewed inflation as being “stickier” than expected.
The bank’s view is echoed by independent economist Cameron Bagrie, who said at a Bluestone seminar earlier this month that it looked like inflation would be harder to contain, putting upward pressure on interest rates.
“[Inflation] might fall more slowly, or it might fall and then stall around the 4% to 5% mark,” Zollner said. “When you look at tradeable inflation, pandemic risks and geopolitical risks, people rethinking their supply chains and climate change, all of those things are upside risks to inflation.”
At a domestic level, climate change impacts on food prices and risks around inflation expectations were also at play, she said.
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