As expected, the RBNZ raised the Official Cash Rate (OCR) by 50 basis points to 3.0% this week.
The Bank also raised the future track for the OCR, forecasting a peak of 4.1% by mid 2023, slightly higher than in the previous May Monetary Policy Statement.
The Reserve Bank upped their forecasts for non-tradeable inflation and wage growth. Labour market and capacity pressures are intense, with the Committee agreeing that domestic inflation is expected to be more persistent than previously expressed in May.
Wage pressures are still picking-up and look set to keep the heat on domestically generated inflationary pressures. The ASB commented that “For now it is about how high the OCR needs to go to front-foot those immediate pressures”.
More generally, economists seem to be of a view that the Reserve Bank will “front-foot” inflation, with Westpac economists commenting that “We’ve long been saying that a little will go a long way when it comes to higher interest rates” given the degree of leverage in the economy, particularly households. They believe that rising interest rates are having the effect that the RBNZ are looking for. They are not expecting a recession but think we’re on track for some fairly lean growth in the years ahead.
BNZ’s economists have a more sanguine view. They believe inflationary pressures have moderated since the previous May Monetary Policy Statement. They believe that the RBNZ do not need to go as far as it is projecting, noting that “It went earlier than most, and monetary settings are now definitively tight”. Despite believing that the Bank does not need to go as hard as thought, the BNZ economists believe it will achieve its objectives.
ANZ economists have highlighted the risks still present while spending and investment continue to outstrip supply capacity. They point to a range of indicators which highlight broad-based domestic pricing pressures, but ultimately seem to agree that the Committee will be resolute and achieve their inflation target.
While coming from different angles, there seems to be agreement that inflation will return to target (1-3%) over the medium term, which will be achieved by growth easing over coming years, rather than a hard landing for the domestic economy. There are risks, but the economists appear to agree that the Bank is in a strong position to get on top of inflation.
The Reserve Bank also published a special article on global inflation developments concluding that there is still considerable uncertainty about the outlook for inflation, but there are signs that pressures are moderating. They note that inflationary pressures differ across regions.
The rise in headline inflation in Europe has been amplified by their geographic and trade proximity of the Ukraine war. Inflation remains lower in China where there is less reliance on imported food and energy, and COVID-19 lockdowns have suppressed activity. New Zealand, Australia, and the United States are experiencing similar trends in headline and core CPI inflation.
It is hard to know whether markets have got ahead of themselves in the recent share market rally. CNN recently reported that things are looking pretty good right now after a summer rally, “but analysts and investors can’t tell whether it’s clear skies ahead or if they’re in the eye of the storm”.
For the present there seems to be the hope that in New Zealand, Australia and the US, central banks will navigate the fine line between raising interest rates and triggering a sharp contraction in activity. As I have noted previously, KiwiSaver and managed funds have benefitted from the recent rally in equities. This is good news for investors, but of course we’re still in for a bumpy period ahead.