The RBNZ will face into an interesting set of crosswinds when it meets this Wednesday.
The domestic economy has clearly continued to run hotter than the RBNZ’s wintry forecasts. The mercury-busting capacity indicators from last week’s QSBO confirm the economy is overheating, a risk we’ve warned of before. The economy is at or close to full employment and labour shortages are rife. What’s more, we think capacity indicators will tighten further. The tailwinds for consumer price inflation and wage growth are thus much stronger than the RBNZ previously forecast.
In short, the economy no longer needs its winter warmers. Accordingly, we brought forward our forecast for the first RBNZ rate hike to this November (from May 2022) last week. It’s since quickly become the consensus. But the question has to be asked, if we’re all so sure rock-bottom interest rates are no longer needed, why wait? After all, November is still four months away and the RBNZ’s favoured “least regrets” analysis much have surely flipped 180 degrees from “chuck the kitchen sink at it” to “woooah back!”
We don’t buy the argument that the debt-laden housing market can’t handle higher rates. Our own research finds households have plenty of buffer to cope with higher mortgage rates. Instead, the key restraining factor is probably the odd polar blast shooting across NZ from the global economy. There’s growing unease about the spreading delta variant, and the attendant health and economic risks. It’s proving frustratingly difficult to contain even in highly vaccinated countries, or those back in lockdown. There’s also the fact that central banks globally – and importantly the US Federal Reserve and RBA – remain reluctant to ease off the accelerator. This means the RBNZ would be going it alone, at least at first. The RBA is still talking about leaving rates where they are until 2024. A three-year gap in NZ-AU tightening cycles would be unprecedented...and seems unlikely to occur one way or the other.
Waiting would give the RBNZ time to assess the above. But this brings its own risks. The economy’s potential to supply could fall further behind demand, forcing the RBNZ to play catch-up. For this reason, we favour the stitch in time approach of getting started sooner. We wouldn’t rule out the possibility of the Bank making a start as soon as August, using this week’s meeting as a possible set-up. In the least, we think the Bank will move to an explicit tightening bias on Wednesday. Any signal about an end-date for its asset purchase (quantitative easing) programme would confirm this.
This week’s economic data are expected to support the case for higher interest rates. Tomorrow morning’s June REINZ data will likely show the housing market remaining stubbornly strong. We think house prices likely recorded another 1-2% gain over the month, even as annual house price inflation cools a little from last month’s 30% record. On Friday, annual CPI inflation is expected to print at an above-market 2.8%, a big jump from last quarter’s 1.5% and a 10-year high. Above-3% inflation beckons by the end of the year.
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 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 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.