Inflation Risks “More Balanced”, Forecast Changes Reflect History

The RBNZ left rates at 5.5% and apart from updates to history and their impact on the forecasts, there was little change in its outlook. The main change seems to be a more neutral tone to the meeting assessment with November’s more hawkish elements removed. The tone suggests that the RBNZ is happy with where rates are for now and is not looking to change them in either direction but policy will need to stay restrictive to return inflation to target.

• Inflation risks are now seen as “more balanced” whereas in November the MPC was concerned and “wary of ongoing inflationary pressures”, so there was no longer mention of rates having to “increase further”. But the RBNZ won’t “tolerate upside surprises” and is ready to act to higher inflation driven by geopolitical and climate developments, including higher shipping costs.
• The Q4 2023 OCR was 0.1pp lower than the November projection. Now that 5.5% for Q4 has been put into the forecast the subsequent quarters are 0.1pp lower too. So the peak rate at 5.6% instead of November’s 5.7% is technical. The RBNZ still expects rates to be on hold until Q2 2025 and 200bp of easing over 2025-2026.
• CPI inflation is still forecast to return to target in Q3 2024 with the midpoint in H2 2025. H1 2024 is now projected to be 0.5pp lower helped by Q4 2023 0.3pp lower than the RBNZ forecast in November. But end-2024 is unrevised at 2.5% and end-2025 at 2.0%.
• There were few changes to growth expectations and the unemployment rate was revised down through to Q3 2025 as employment growth is expected to be stronger. Q1 2024 labour costs were revised up 0.2pp to 3.8%.