MNI RBNZ WATCH: Hike Expected as Key Inflation Inputs Sticky

The Reserve Bank of New Zealand will likely increase the Official Cash Rate again at its May 24 meeting, with markets and commentators tipping another 25-50bp from its current 5.25% despite emerging signs of moderating inflation.

The OCR decision will coincide with the quarterly publication of the RBNZ’s Monetary Policy Statement, which the market will watch closely for an update to the peak rate forecast. In its last two statements, the RBNZ forecasted a 5.5% peak some time in the middle of 2023. Ex-staffers now predict the Bank will meet that before shifting to a more dovish stance with a potential pause at the July 12 meeting (See MNI INTERVIEW: OCR At 5.5% Before Pause - Ex-RBNZ Deputy Gov).

Overnight index swap rates, however, have priced in the potential for an OCR cycle maximum of 6% by the Oct 4 meeting, with a cut priced in for November, a sharp change from the 5.26% peak forecasted by markets leading into April’s decision (See: MNI RBNZ WATCH: 25bp Lift Expected, Peak Priced Lower).

The recent government budget, largely seen as inflationary due to added spending on disaster recovery, has added to the market’s belief in further RBNZ action, despite inflation likely peaking.

THE PEAK?

While inflation figures released April showed CPI at 6.7% y/y to March, down from 7.2% recorded in December and the 7.3% peak in September 2022, other key elements of inflation have remained strong.

Ex-staffers note the Bank’s attention will likely shift to March quarter employment, wages and food price data. Unemployment remained unchanged at 3.4% over Q1 2023, while wage inflation rose to 4.3% from 4.1% in Q4 2022. Food prices gained 12.5% annually to April, up from March’s y/y 12.1% rise, while nontradable inflation – another important input for the RBNZ – also strengthened in Q1 to 1.7% q/q from the 1.5% recorded in Q4 2022.

STRONG IMMIGRATION

Analysts and commentators will also monitor closely the Bank’s view on immigration. New Zealand recorded a 199% increase in migrant arrivals for the year ending in March, with an annual net-migration gain of 65,400, up from the prior month’s net yearly gain of 11,700.

Local economists debate the impact of immigration on inflation and they will monitor closely the RBNZ's view on the higher number of people and the impact on prices. More people will loosen the tight labour market, but they will add demand to the economy.