Official cash rate: Economists predict another double-hike as 'very lofty' inflation pressures continue

Economists are expecting yet another double-hike to the official cash rate (OCR) with inflation remaining too high and the labour market "highly stretched". 

The Reserve Bank (RBNZ) will on Wednesday reveal the latest change to the OCR. It follows two consecutive 50 basis point jumps earlier this year, hitting 2 percent in May - the highest the rate has been since 2016.

In line with forecasts made by the RBNZ in its latest Monetary Policy Statement (MPS), economists from a number of major banks are predicting another double-hike, which would take the OCR to 2.5 percent. The last time it was that high was in January 2016.

"Since the RBNZ's May MPS, sentiment both internationally and domestically has gotten worse from an already-dark place," said ASB economist Nathaniel Keall in a preview of the RBNZ's decision. "Equity markets have tumbled to new eighteen-month lows, while global growth forecasts have had some pretty chunky downward revisions."

Keall pointed out that New Zealand's Gross Domestic Product (GDP) fell 0.2 percent in the first quarter of 2022, while numerous surveys show business and consumer confidence at historic lows, raising concerns of a recession looming.

However, despite that, the economist said "inflationary pressures remain very lofty and underpinned by severe capacity constraints, with no clear signs that forward-looking inflation expectations are peaking". There's also low unemployment meanings businesses are struggling to find workers "even as activity slows". 

"In other words, the looming slowdown is going to need to trigger a material easing in capacity pressures and a substantial relaxation in the labour market before the RBNZ can be comfortable it's no longer overshooting its inflation or labour market targets."

The latest Consumer Price Index (CPI) figures were for the March quarter, when annual inflation hit 6.9 percent, far above the RBNZ's target of 1 to 3 percent. The next CPI update will be on July 18 and ASB has it peaking around 7 percent before starting to ease.

"But there is a risk that it remains well outside the 1-3 percent target for a prolonged period," Keall said. "Right now, the balance of risks may skew firmly in favour of further tightening, but 2023 may bring tougher trade-offs."

Sharon Zollner, the chief economist at ANZ, said data since the May MPS "has not provided any compelling reason to diverge" from 50 basis point shifts upwards.

"Cost and inflation indicators out of both our ANZ Business Outlook survey and the NZIER's Quarterly Survey of Business Opinion continue to show no let-up. The glass-half-full take is that the indicators have more or less stopped rising, but the RBNZ needs them to fall markedly."

BNZ's Stephen Toplis said the RBNZ would be pressing "repeat". 

"Only when the Reserve Bank feels satisfied its targets are in reach will it ease its foot off the brake. It is unlikely to feel this way for a while yet," he said. 

"If we were in charge, we would probably argue for the RBNZ to be taking a cautious approach given that rates are now around neutral (mortgage rates arguably well above), leading indicators are increasingly worrying and uncertainty continues to reign. This being so, 25 basis point licks would seem an apt response. 

"However, we would be gobsmacked if the Bank did anything other than 50 this time around, especially when market pricing is so convinced of such a move, largely because the RBNZ intimated that would be the case."

Nathan Penny, an economist at Westpac, said with "inflation elevated, the labour market highly stretched and output running well above trend, we expect the RBNZ to continue on the path of rate hikes that it previously laid out". 

"The August Monetary Policy Statement, on the other hand, could be a different matter. We expect a fourth 50bp hike at that date, which would bring the OCR up to 3 percent. That's getting much closer to the RBNZ's projected peak of 3.9 percent (and our forecast of a 3.5 percent peak) and is more plausibly in the range of 'tight' monetary policy settings. 

"At that point, we think the RBNZ could shift its tone and signal that it's getting on top of the situation. And from there, the RBNZ could assert that further OCR hikes are likely but that the extent of them will be data-dependent."

Economist Tony Alexander said in a report on Monday that the RBNZ will need to "see consumer spending being crunched to feel confident that monetary policy tightening is working". 

"Our survey says it is and this is a further sign that additional rises in mortgage rates from current levels will be minor and largely confined to the floating and up to one-year terms."

A consumer survey conducted by Alexander found that a net 27 percent of respondents plan to reduce their spending over the next three to six months, a deterioration from a net 21 percent in June. 

"The confidence which people have for the future has worsened to a net 29 percent pessimistic compared with a net 20 percent optimistic at the end of 2020 and 5 percent pessimistic at the end of 2021," he wrote. 

"Note the decline in sentiment in the middle of last year coincident with mortgage rates rising and inflation hitting 3.3 percent. The next big change came at the start of this year as house prices started falling, reports of the credit crunch became more frequent, and inflation hit 5.9 percent."