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Economic Weekly: Heading off the inflation sucker punch

When asked about strategy in the ring, the great Mike Tyson – up there with Adam Smith and J.M. Keynes as one of history’s great Economic sages – once said, “everybody’s got a plan until they get punched in the mouth.”

Until relatively recently, major central banks had similar plans for how they expected the next couple of years to play out. While the pandemic fallout hadn’t been as bad as feared in many parts of the world, the recovery would be a fragile thing and monetary policy would need to remain highly accommodative for some time as the labour market wended its way back to health. ‘Transitory’ factors would see inflation tick up over the short term, before once again abating. Rate hikes would come slowly and at a gradual pace. The RBNZ was very much part of this cohort.

Over the past couple of months, a succession of left and right jabs has meant those plans have gone out the window. For the RBNZ, the left punch here has been the resilience in the labour market, with the economy looking closer to full employment, much earlier than the Bank previously forecast. The right hook has been the continuing build up in inflationary pressures, culminating in the monster CPI result on Friday, which saw annual inflation hitting 3.3% (versus the RBNZ’s expectations of a 2.8% lift). Neither factor looks likely to throw in the towel any time soon – in particular, we expect headline inflation to approach 4% over the second half of the year as stretched capacity pressures linger.

Sure enough, we saw the RBNZ change tack and make a sharp hawkish turn at last Wednesday’s Monetary Policy Review (after some hints back in May), announcing the end of the Large-Scale Asset Purchase programme and excising wording around the ‘considerable time and patience’ the recovery would need. We now expect a swift one-two of 25bps OCR hikes in August and November.

Still, despite the change of plan, not all of our views have shifted dramatically. While there is some risk the Bank moves to quickly normalise policy, we still think it’s more likely to stick to a gradual pace given the lingering uncertainty – NSW’s mishandled outbreak of the Delta COVID variant shows there are clearly still downside risks remaining. And we continue to expect a relatively low OCR endpoint of 1.50%.

Still, the direction of travel is clear – wholesale and retail rates are past their lows and are likely to head higher, sooner than previously expected. For borrowers and savers, it’s a prudent time to review interest rate exposures and check you’ve got the right mix for your financial needs.

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Jane Turner

Senior Economist

Originally hailing from sunny Nelson, Jane moved to Auckland to join the ASB team in 2008.  As Senior Economist, Jane's main focus is co-ordinating the team’s macro-economic forecasts.  In this key role, Jane was thrilled by the team’s twice consecutive win of the Consensus Economics Forecast Accuracy award.   

During her decade-long career in economic forecasting, Jane has gained a thorough knowledge of the New Zealand economy.  Her current focus is on New Zealand GDP growth, including both manufacturing and the construction sectors.  She has spent time forecasting most sectors of the economy, including inflation, trade, housing, labour and financial markets.

Prior to joining ASB, Jane honed her macro-economic forecasting skills at the Reserve Bank of New Zealand.  Jane is a qualified scarfie, attending Otago University and graduating with a Bachelor of Commerce in Economics with 1st class honours.  In 2014, she took a career break from ASB to travel the world and learn to snowboard.

Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.

Mike Jones

Senior Economist

Mike joined ASB in 2019 armed with almost 15 years of experience in applied macroeconomic and financial markets analysis.

Mike's career has been all about distilling the risks and opportunities of economic and financial market trends for business. Basically asking the "what does it all mean" question. Mike's enthusiasm and skill for drawing out practical, commercial insights from the murky world of economics has been honed over a relatively broad base of experience.

After spending the early part of his career on the tools at the Reserve Banks of both NZ and Australia, Mike had a lengthy stint at BNZ where he was NZ’s top-ranked currency strategist. His regular and topical macro research also saw him pick up several FX forecast accuracy gongs from Bloomberg.

Drawn in by the prospect of putting strategy into practice, Mike moved from Wellington to Auckland in 2013 to join Fonterra as GM Treasury Risk Management. In this role, Mike lead Fonterra’s macroeconomic research output, and was responsible for the strategy and execution of Fonterra’s foreign exchange, debt, and interest rate hedging programmes.

mike.jones@asb.co.nz