Reserve Bank set to hold rates again, but later hikes still on the cards - economists

The central bank will likely hold the official cash rate at 5.5 percent on Wednesday but could still hike it later this year as inflation remains sticky, economists say. 

New Zealand's 6 percent inflation rate, well above the Reserve Bank's (RBNZ) target range of between 1 and 3 percent, and stronger-than-expected economic indicators suggested further monetary policy tightening could be needed, independent economist Cameron Bagrie told AM on Tuesday. 

"We're seeing... better economic news," he said. "Better economic news is a better economic development, of course, [but] those economic developments are not great for inflation." 

Bagrie expected another hike to come later this year or in early 2024. 

"With each passing month, the more we see the likes of the property market start to kick up, the more that becomes a bit more of an inflationary risk in 2024 and 2025. 

"There is a growing risk that the Reserve Bank's going to be hiking interest rates before the end of the year and odds are if they feel they need to do one... if you resume a tightening cycle, you'll end up doing two." 

Among major New Zealand banks, ANZ and Westpac believed the RBNZ wasn't quite finished with its tightening cycle. ASB believed the central bank had done enough but expected rates to remain higher for longer. 

"The surprising resilience in recent economic activity as well as ongoing upward revisions to net migration could delay inflation returning to the RBNZ's 1-3% percent target," ASB said.  

"At the same time though, financial conditions in New Zealand have tightened further and there is more tightening to come as more borrowers roll on to higher mortgage interest rates. Let's also not forget that there is an election in two weeks with all the uncertainty associated with a potential change in Government." 

Miniature wooden houses and a green arrow down. The concept of low cost real estate. Lower mortgage interest rates. Falling prices for rental housing and apartments. Reducing demand for home buying
Photo credit: File

ASB senior economist Mark Smith said its latest business opinion survey, published on Tuesday, pointed to easing labour market capacity - which could reduce the need for further hikes.

"Capacity pressures continue to significantly ease in the labour market and hold out the prospect of inflation moving lower on a sustained basis.

"Nonetheless, pricing and cost metrics remain too high, with a lengthy period of restrictive OCR settings needed to ensure inflation settle."

As such, ASB was now not forecasting rate cuts until February 2025. 

"The outlook remains inherently uncertain but absent of a large deflationary shock, the stickiness of core inflation at well above 3 percent dictates a longer period of restrictive monetary settings will be necessary to drive inflation lower."