Will the OCR jump by at least 50 basis points again tomorrow? Interest rates could reach a record high!

According to YIJU's research, many economists' general assessment of New Zealand's current economic outlook is that, with inflation still near a three-decade high, the Reserve Bank of New Zealand (RBNZ) is very likely to raise the Official Cash Rate (OCR) by another 50 basis points at its latest interest rate review this Wednesday, taking it to a new high of 4.75%.

 

The Reserve Bank of New Zealand was among the first central banks internationally to begin withdrawing pandemic economic stimulus. Since October 2021, it has raised rates by a cumulative 400 basis points. The widespread expectation is that the total increase could ultimately reach 500 basis points. In other words, the OCR could peak at 5.25% or higher.

 

The Reserve Bank of New Zealand's own forecast is even higher than outside forecasts, putting the eventual OCR at an unprecedented 5.50%. This is because it believes the current high inflation rate of 7.2% may not fall within its 1–3% target range until next year. Of course, this may be “wishful thinking” on the Reserve Bank's part. Sharply falling New Zealand house prices, alongside concerns about a global economic slowdown and other adverse factors, will force it to take a cautious approach to further rate rises.

 

Forecasts from New Zealand's major commercial banks

 

Economists at ANZ, ASB, Kiwibank, BNZ and Westpac all predict that the Reserve Bank of New Zealand will raise rates by 50 basis points this Wednesday.

 

ANZ chief economist Sharon Zollner explained that, although the Reserve Bank forecast a 75 basis point increase in November last year, the latest inflation and labour market employment reports from Stats NZ indicate that inflationary pressures are somewhat weaker than previously forecast. Economists therefore consider 50 basis points an appropriate increase

 

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Undeniably, whether the OCR rises also depends on developments across New Zealand's economy. Kiwibank chief economist Jarrod Kerr recently said the Reserve Bank of New Zealand was very likely to hold off on any rate increase next week following the recent devastation caused by Cyclone Gabrielle and the national emergency.

 

Kerr believes the Reserve Bank should consider the impact of the current emergency on New Zealand's economy, which needs some breathing space. Government officials should recognise the financial losses people are suffering. A pause in next week's interest rate review would be welcomed by most New Zealanders, as relief in various forms is what people most need in a crisis. Kerr said a rate rise of any size during an emergency might not be the macroeconomic policy response the market really needs.

 

He suggested that the Reserve Bank could resume rate rises in April if circumstances required, allowing it to gain a clearer understanding of how higher interest rates were affecting the economy. The government needed to recognise that many businesses and households had lost income in the floods, with the overall impact on the national economy potentially reaching hundreds of millions of New Zealand dollars rather than merely millions. Kerr noted that post-disaster rebuilding would boost the economy but also increase inflation, particularly in the construction industry, which was already facing capacity constraints.

 

 

Analysis from an experienced economic commentator

 

Economic news commentator David Hargreaves believes that, whether the Reserve Bank of New Zealand chooses a 50 or 75 basis point increase at its OCR review, the decision will have a major impact on New Zealand's economic development. He believes the Reserve Bank “hopes” to see some “easing” in the extremely tight labour market, meaning higher unemployment, and slower consumer spending. This would cool the economy and ease high inflation.

 

In his view, signs since the end of last year suggest the Reserve Bank's rate rises have achieved some of their intended effects. The annual inflation rate for the fourth quarter, announced last December, was 7.2%, unchanged from the third-quarter figure announced in September. More importantly, domestic inflation remained at 6.6%, well below the Reserve Bank's forecast of 7.0%. The unemployment rate announced in December rose from 3.3% to 3.4%, contrary to the Reserve Bank's forecast that it would fall to 3.2%. Annual growth in average hourly earnings in the private sector was 8.1%, which was 1% below the Reserve Bank's forecast of 9.1%. Meanwhile, job advertisements and card spending transaction data both fell sharply in December. Moving into 2023, job advertisements and card spending increased noticeably, with card transaction values rising by 2.6%. These are relatively positive signals.

 

 

So what impact will the severe cyclone and flooding have on our economy? Hargreaves said they would further cloud an already uncertain economic outlook. For example, if flood victims need new carpets, this will boost spending, but it may also cause inflation: a sudden surge in people buying replacement carpets could quickly create shortages. Inadequate production capacity, shortages of food and groceries, and infrastructure needing repair will also intensify inflation. The disaster will bring a sudden surge in demand for consumer durables, alongside a chain reaction of price increases caused by supply chain problems. Taken together, these adverse effects are undoubtedly a “nightmare” for the Reserve Bank of New Zealand and could undo all its efforts to curb inflation.

 

Under current economic conditions, the Reserve Bank needs to raise the OCR by 50 or even 75 basis points to bring inflation back within its 1–3% target range. Assuming it raises the rate by 50 basis points this Wednesday to 4.75%, it would then have only 50 basis points of room left. This means the OCR will soon peak in the first half of this year. Clearly, to demonstrate its determination to fight inflation, the Reserve Bank of New Zealand does not want people to feel that rate rises have reached their limit. But if it cannot communicate this convincingly, there is a risk that markets will drive interest rates lower themselves, effectively “easing” monetary policy. Another, less likely possibility is that the Reserve Bank will consider raising the OCR by just 25 basis points this Wednesday. Hargreaves believes that, whatever happens, the Reserve Bank needs a more flexible approach to interest rate policy.