MNI INTERVIEW: Baked-In Inflation To Quash RBNZ Rate Cut Hopes

Baked-in price hikes for non-tradable items and legacy fixed mortgages yet to roll on to higher rates will keep inflationary pressure elevated throughout 2024 and the Reserve Bank of New Zealand’s Official Cash Rate higher for longer, a former deputy governor told MNI.

Peter Nicholl, deputy governor of the RBNZ between 1990-1995 and former governor of the Central Bank of Bosnia, said New Zealand will experience stickier price rises this year due to structural factors which differ from other countries. “I don't see interest rates coming down anytime this year,” he said. “The [RBNZ] was one of the quickest to start raising interest rates… even if they were too slow, they just happen to be faster than most other central banks who were pathetically slow. But I don't expect them to be the first ones coming down the other side.”

Reserve Bank Governor Adrian Orr noted last week in an interview with RNZ that global interest rates had likely peaked and cuts were getting closer, however, inflation expectations were still a concern. New Zealand dollar overnight index swaps market have priced in a 25-basis-point cut to the 5.5% OCR by August.

Nicholl noted that local governments across New Zealand were still increasing their rates by 10-20%, while insurance premiums were also rising fast. “There's a number of quite substantial price pressures coming through,” he said, adding mortgage holders will continue to feel pressure as they move on to higher rates.

Westpac estimates average mortgage rates will peak sometime in 2025. (See chart)

“There's a lot of pretty hefty and quite important price effects still coming through," Nicholl noted. "I expect inflation to moderate slower than the optimistic views from the Reserve Bank and the Treasury.”

The RBNZ has stated it does not expect rate cuts soon, despite lowering its peak official cash rate forecast in February when the monetary policy committee decided to hold. (See MNI RBNZ WATCH: RBNZ Leaves Rates On Hold, Downgrades OCR Peak) The Reserve last hiked the rate in May 2023.

WIDER MISSTEPS

Nicholl called on central banks in the developed world to renounce quantitative easing and their ability to conduct any similar action in future, arguing that the root cause of present inflation lay in unconventional policy action, such as bond-buying programmes.

He noted the RBNZ in particular, similar to other peer central banks, had come to believe it could solve any problem, rejecting the lessons and reforms of the 1990s and 1980s. Monetary policy had a comparative advantage over inflation, but was generally weak when focused on other issues, he added.

"But 30 years later, central banks lost that humility and certainly thought they could solve every problem in the world and when the first-round policies didn't work, they doubled up and doubled up again," he noted. "I blame the central banks for actually creating the inflation problem that they're now trying to solve."