Demand-Driven Inflation Risks Push OCR Path Higher, RBNZ On Alert

The RBNZ left rates at 5.5% as was widely expected but given the statement and forecast revisions it was a hawkish hold. The impact of strong population growth has become “apparent” and it is “increasing the risk of inflation remaining above target”. The MPC noted that it “would likely need to increase” rates again if inflation is higher than expected. Given it said inflation remains too high and its concern re “excess demand and inflationary pressures”, price and demand indicators will be key to the NZ rate outlook.

• The RBNZ still expects inflation to return to target in Q3 2024 but it has been revised up to the edge of the band at 2.9% from 2.7% to reflect stronger demand. It seems this is the limit of the RBNZ’s timeframe and another upward revision would prompt them to tighten again. However, the quarterly forecast CPI increases are little changed.
• GDP growth was revised up in the 3 quarters to Q1 2024 with a recession no longer in the projections. The unemployment rate was also revised lower across the forecast period.
• Given these changes to the outlook and higher expected H2 2024 inflation, it is not surprising that the OCR path was also revised higher across the time horizon. The peak in 2024 is now 0.1pp higher at 5.7% but Q4 is 0.2pp higher, implying another 25bp hike. But Governor Orr is likely to reiterate that these forecasts are not forward guidance in his upcoming press conference.
• The first rate cut has been pushed out to Q3 2025 from H1 2025 taking into account this is model output, and 50bp have been taken out of the forecast by Q3 2026, which sends a hawkish message.
• See statement with forecasts here.