MNI: RBNZ Hike Uncertain As Recovery Gathers Pace

A rate hike at next week's Reserve Bank of New Zealand Monetary Policy Committee meeting is far from certain as policymakers weigh conflicting domestic and global pressures, though they are likely to need to begin raising rates later this year as economic recovery gathers pace, prominent economists told MNI. 

The committee will focus on where the economy sits in the cycle and the size of the output gap when it meets on Wednesday, said Michael Reddell, independent commentator and former RBNZ special adviser. While policymakers are beginning to consider when it will be appropriate to tighten policy, he expects them to wait for more inflation data and hold the Official Cash Rate at 2.25% next week. 

"I think mostly what you'll see is commentary on oil, a bit on the GDP numbers, and then really a holding action, given that the CPI is still ahead of them," Reddell said, pointing to Q2 inflation results due July 21. "The key consideration is stripping out oil and related effects and seeing where core inflation is. On an optimistic view, core inflation was already heading towards 2% and not showing signs of picking up materially."

Although markets have priced around a 74% chance of a 25 basis-point hike next week, Reddell sees December following the national election as the more likely starting point for tightening.

"If the CPI data showed core inflation had continued trending down, which is not at all implausible given what's happening in the rental market, then you can quite easily get to December," he said.

SWIFTER HIKES

Cameron Bagrie, managing director and chief economist at Bagrie Economics, argued the RBNZ should begin tightening immediately, lifting the OCR by 25bp next week and moving more quickly toward the estimated 3% neutral level.

"When you look at core inflation, it's around 2.5% to 3%, you've got an economy that's turning, and productivity growth is awful," Bagrie said. "You don't have the capacity to absorb much of a pickup in demand before you start running into capacity constraints."

Labour market conditions were already improving and New Zealand's limited supply-side capacity meant even moderate GDP growth would quickly erode spare capacity, he argued. "The phrase I'm using in New Zealand at the moment, is that we're entering a period of 'broccoli and spinach'. Not everybody likes broccoli and spinach, but it tends to be good for you. Let's just get the OCR around neutral and that's a comfortable level to have it when you've got all this uncertainty." 

Reddell, however, questioned the wisdom of moving rapidly towards neutral without a clearer estimate of where that level lies. "We don't have an up-to-date read on core inflation," he said. "If the Bank were to move next week, I wouldn't say it's a big mistake. It's just a question of whether it's urgent. I don't see it as urgent given the remaining weakness in the labour market, the rental market and residential construction."