MNI: RBNZ To Hold, Hikes Not Likely Until H2 -Former Officials
The Reserve Bank of New Zealand’s Monetary Policy Committee is expected to hold its official cash rate at 2.25% next week, with any increases unlikely until later in the year absent a significant shift in core inflation, former officials told MNI.
“I’m probably a little more dovish than the consensus,” said Michael Reddell, independent commentator and former RBNZ special adviser, noting trimmed-mean inflation was running close to 2% and had shown little sign of accelerating in the way seen in Australia.
While headline inflation remains above target at 3.1%, Reddell said underlying pressures were less concerning. Rent, for instance, should continue to pull domestic inflation measures lower over time, he noted, adding that non-tradables inflation was broadly consistent with the midpoint of the target band. Tradables inflation had been relatively firm, though drivers were unclear, he continued, citing spillovers from Australia, including elevated trans-Tasman airfares, as a partial factor.
The chance of another rate cut – plausible late last year – had now faded, but the case for hikes remains uncertain given modest growth and a still-negative output gap. “I wouldn’t rule out a hike this year, but maybe it’s a 30-40% chance, becoming more likely into the first half of next year,” he said.
RBNZ overnight index swaps have priced in a 2.7% OCR by December, which suggest at least two increases in the second half.
Reddell also suggested the RBNZ’s 50bp October cut may have exceeded what was required, noting policy cycles often overshoot. (See MNI RBNZ WATCH: MPC Strengthens Easing Bias With 50bp Cut) Moving to hikes within a year of the last cut would imply policymakers had misread conditions, though late-year tightening was not impossible.
Labour market conditions reinforce the need for caution, he added, contrasting New Zealand’s slack and rising unemployment with Australia’s tighter backdrop. “You’d have to see something really concerning on inflation to move soon, and we haven’t seen that once you strip out insurance and rates distortions.”
Geoff Bascand, director at Nelson Building Society and RBNZ deputy governor from 2017 to 2021, said external demand remains supportive but domestic activity is subdued. Export incomes – including strong meat prices – are holding up, but consumption and investment are weak as households adjusted after post-pandemic spending, paid down debt and absorbed higher living costs.
Employment growth had been soft, unemployment had edged higher and housing construction and manufacturing investment remain subdued, he said, while geopolitical uncertainty is also weighing on business spending. Still, improving confidence and export income flows could support a gradual pickup.
“We may just start to see some modest growth build momentum, but there’s still quite a lot of uncertainty,” Bascand said, citing general elections due by November and global inflation risks.
It is also still unclear how the RBNZ’s new Governor Anna Breman will assess economic conditions, he added. “There’s a bit of wait-and-see around what the new governor says and how she leads the committee.”
RBNZ REVIEW
Commenting on the government’s recently-announced review of the central bank's Covid-19 response, Reddell said expectations for major findings should be modest.
The review, led by former Bank of Cyprus governor Athanasios Orphanides and ex-BIS economist David Archer, is due within six months.
Reddell said the exercise fulfilled a political commitment to conduct an independent assessment but was unlikely to provide materially new conclusions, noting similar policy misjudgements occurred globally as central banks misread post-pandemic inflation dynamics.
While the review’s timing – shortly before the election – had drawn political scrutiny, he said both reviewers were technocrats unlikely to produce a partisan report.
Debates over policy lessons had already been underway for several years, he added, limiting the scope for surprises when findings are released.
