The Reserve Bank is set to deliver a fourth consecutive 50 basis point rise in the official cash (OCR), taking it to a seven-year high of 3 percent, as it continues its all out assault on inflation at a 32-year high.
It will be the seventh rise in the OCR since last October, the most aggressive tightening cycle since the current monetary policy system was instituted in 1999, and the accompanying statement and forecasts will seek to reinforce the idea it is not done yet.
BNZ head of research Stephen Toplis said for all the ructions on financial markets and economic numbers, little had changed of late.
“Once everything is thrown into the mix, the outlook for New Zealand inflation and the labor market is little changed from what the Reserve Bank was looking at when it delivered its July Monetary Policy Review or, for that matter, its May Monetary Policy Statement. “
“Why would one expect the Reserve Bank to deliver an interest rate message that was significantly different to that of the May MPS [monetary policy statement]? “
The June quarter inflation numbers, with consumer prices topping the RBNZ’s guess at 7.3 percent blew away even the vaguest chance the central bank might contemplate easing back off the interest rate brakes on the economy.
Toplis said falling global fuel prices were likely to mean headline inflation falling before too long.
But more importantly is the strength of domestic inflation pressures – the so-called non-tradables – such as rents, fees, rates, and above all wages.
The RBNZ has a dual mandate from government – keep inflation in check, and maximise “sustainable” employment.
By any measure it has under achieved on the first, and overdone it on the second, with the unemployment rate at close to record lows and wages rising at the fastest rate in more than a decade.
The RBNZ’s tone is expected to remain hawkish, with a repetition of a “resolute” determination to get inflation back under control, albeit with a nod towards the slowdown in the local and global economy.
“The domestically-generated pressures are set to remain for some time, with the labor market a key influence on how persistent inflation pressures will be,” said ASB chief economist Nick Tuffley.
In the absence of an influx of foreign workers, or improved productivity, the RBNZ had to reduce demand in the economy, including the demand for labor, Tuffley said.
That would mean continued tough talk and economic forecasts to match, notably the projection of where the OCR might reach.
The RBNZ’s May forecasts implied the OCR at 3.5 percent by the end of the year and possibly near 4 percent by the middle of next year, before the chance of rate cuts towards the end of 2024.
Fisher Funds head of fixed income David McLeish said financial markets were already starting to price in the chance of a cut in the OCR by the end of next year to stave the prospect of a significant economic downturn.
“Already financial markets are starting to believe that we’re nearing very tight monetary policy conditions and it won’t be very long before economies roll over and before they’re forced to shift to cutting official cash rates.”
The markets’ confident view of rate cuts sooner than later has been a factor in the recent falls in some short-term mortgage rates.
But Westpac acting chief economist Michael Gordon is picking the cash rate to hit 4 percent and stay there for some time, which would set up a tussle between the RBNZ and markets.
“We think that drop has been too hasty. The RBNZ will be reluctant to encourage a further move lower in borrowing rates while it’s still in the thick of its inflation battle.”