OCR: Economist Tony Alexander doesn't believe economy will slip into recession despite Reserve Bank forecasts

An expert doesn't believe New Zealand will slip into recession despite the Reserve Bank (RBNZ) forecasting the economy to contract next year.

In a historic move, the RBNZ raised the official cash rate (OCR) by 75 basis points on Wednesday - its largest-ever hike - and said New Zealand was likely heading for a recession in 2023.

And, with no signs of the economy cooling any time soon, a tough 2023 could be in store for borrowers.

But independent economist Tony Alexander doesn't completely agree with the RBNZ's recession forecasts.

"I still think, in New Zealand, we won't have a recession but, if we do, it'll be very shallow because we've got good support for the economy from the boom in inbound tourism, the relatively low Kiwi dollar, high job security as well," Alexander told Newshub Late on Wednesday.

"A lot of people [have] basically still got some good money there and [are] willing to spend it - they've saved up money during the pandemic."

But he warned there was still underlying inflation in New Zealand's economy, which contributed to Wednesday's record-breaking OCR hike.

"The economy is basically in better shape than the Reserve Bank was thinking and so there's more underlying inflation that they were previously forecasting," Alexander said.

Where will the impact be? 

People that could be the hardest by Wednesday's OCR hike were those with floating mortgage rates, Alexander explained.

"That rate is very closely tied to the official cash rate of the Reserve Bank but, for fixed mortgage rates, maybe there's only about another 0.5 percent left for those interest rates to go up - because the markets had already expected that the cash rate would get towards 5 or 5.5 percent," he said.

"This is mainly for people who have got floating mortgage rates. Fixed rates? Up - but nowhere as much as floating."

'Cool the jets' 

So far, the 400 basis points added to the OCR since October last year had failed to crunch consumer spending as the RBNZ would've hoped.

"We are still spending up large," Alexander said.

The RBNZ, as a result, had a "serious problem" on its hands, Milford Asset Management investment analyst Katlyn Parker told AM.

"Consumers are still spending, we're not seeing any slack in the labour market - that all points to tighter monetary policy but, whilst they're forecasting a recession next year, they're also not forecasting inflation to get back to their target until well into 2024," she said, referring to the RBNZ's consumer price index target of between 1-3 percent (it's currently 7.2 percent). 

"That is a brutal combination for businesses," Parker added.

With tough times ahead next year, people needed to think harder about their spending, RBNZ Governor Adrian Orr said on Wednesday.

"Think about saving rather than consuming - I know that's a strange concept," he told a press conference. "Just cool the jets."