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With the economy in a holding pattern as inflationary and recessionary forces struggle for the upper hand, the Reserve Bank’s forecast will hold more interest than Wednesday’s real rate call.
Another 50 basis point hike to the
The official exchange rate – bringing it to 3% – is considered a virtual certainty by economists.
“It’s been a settled issue for some time,” said Westpac chief economist Michael Gordon.
“Even though the Reserve Bank had not repeated its formulation of tightening monetary conditions ‘at pace’ in its July review, the need for a strong and continued response to inflation was all too evident. .”
The bigger question now was what the RBNZ was signaling for the way forward, he said.
“The outlook is becoming more mixed, with activity slowing but inflationary pressures even stronger than expected. Additionally, financial markets are now trying to outpace the central bank in the other direction, pricing a lower spike in the OCR cycle and a turn to rate cuts as early as August next year.”
To push back, the RBNZ should continue to emphasize its inflation-fighting credentials, he said.
“His task requires not just raising interest rates to a certain level, but keeping them there long enough to do their job of restoring demand.”
Any softening in the RBNZ’s tone could lead to an even deeper drop in market interest rates, which could undermine the good work being done by the RBNZ, he said.
ANZ chief economist Sharon Zollner agreed the RBNZ would likely adopt “a hawkish tone”.
“Overall, the data flow, while certainly not one-sided, has become more inflationary than the RBNZ forecast in May. For this reason, a 75 basis point hike cannot be ruled out. , but this far into the cycle, the RBNZ can provide the tightening it needs with a 50bps hike, a firm forecast OCR track and faithful messaging.”
This economic cycle has been marked by extreme volatility in financial markets and data results that were miles from expectations, said Stephen Toplis, head of research at BNZ.
“Yet amid all the noise, once it’s all thrown into the mix, the outlook for inflation and the labor market in New Zealand is little changed from what the Reserve Bank envisioned when it first announced it. released its July Monetary Policy Review or, for that matter, its May Monetary Policy Statement.
Given that June’s higher-than-expected annual consumer price index inflation (at 7.3% versus the Bank’s 7% pick), there were “clear signs that this surprise upwards will be completely reversed within the next six months,” he said. .
“Key to this is falling oil prices, but we also expect significant downward pressure from the broad decline in global commodity prices that is occurring.”
Wage inflation would remain above the RBNZ forecast for some time, he said.
“We also believe that wage pressure will continue to keep non-traded goods inflation high. But how long will this pressure last if the unemployment rate continues to rise?
“So again, looking through the noise, it seems there isn’t enough information in the labor data to indicate that the rate track previously released by the Reserve Bank should be
materially suitable. »
ANZ’s Zollner noted house prices were down about 7% from their peak, with flow effects on construction indicators.
“So monetary policy is definitely working,” she said. “But so far, while spending data is everywhere (so to speak), it’s fair to say it hasn’t slowed as much as consumer surveys suggest.”
Anecdotal evidence suggested that consumers were redefining their spending “but not yet closing their wallets.”
“Monetary policy takes time to fuel the economy,” she said. “But one thing is certain: with inflation so high and widespread, and wages rising rapidly, in a framework of least regret, the RBNZ cannot afford to make optimistic assumptions about the degree of effective monetary tightening that She bring.”