MNI RBNZ WATCH: Lower GDP Surprise, Higher OCR Working

New Zealand will likely experience a recession, despite the Treasury’s recent forecasts to the contrary, illustrating that the interest-rate sensitive parts of the economy are starting to slow, according to Reserve Bank of New Zealand officials.

At a press conference following the Reserve’s decision to hike the Official Cash Rate 25bp to 5.5%, Chief Economist Paul Conway said the RBNZ expected the economy to record two consecutive quarters of negative GDP, with Q2 declining 0.1-0.2%, following 0.3% growth over Q1. “So definitely a soft patch in terms of GDP,” he noted. “That's a little bit south of the Treasury's projections, but by the same token, our projections have inflation coming back into the [1-3%] band more quickly.”

The RBNZ reverted to a smaller 25bp rise to meet its expected peak Official Cash Rate today (see: MNI BRIEF: RBNZ Hikes OCR To 5.5% "Peak," Rates Restrictive), decelerating from the 50-75bp moves seen since February 2022. The Reserve noted in its release and accompanying quarterly Monetary Policy Statement that higher rates had begun to slow the economy and reduce inflation.

"It's quite nice to see some of the things we were hoping would already be here, actually be here," noted Governor Adrian Orr at the press event, pointing to the lower GDP and decline in inflation. "All of the indicators suggest the interest sensitive parts of the New Zealand economy are yielding, slowing and inflation pressures coming out."

The MPS also showed the Reserve’s peak OCR forecast remained unchanged, however, the central bank now expects the rate to fall faster than its February assumption. The Bank noted demand and inflation had slowed faster than expected, however, its forecasted return of CPI to 2% by 2025 was unchanged (see chart below).

LABOUR, IMMIGRATION & FISCAL POLICY

Leading into the decision, ex-staffers and commentators noted labour, immigration and government spending would be key to understanding the Reserve’s strategy (see: MNI RBNZ WATCH: Hike Expected as Key Inflation Inputs Sticky).

On immigration, the RBNZ noted views among board members were mixed. Pent up domestic demand had likely driven price strength, and high net migration levels could help loosen the tight labour market, the Board noted.

At the press conference, Orr explained immigration will trend downwards to pre-Covid levels. Although “still a strong number, around 35,000 per annum, but the big surge has happened and is already behind us,” he added. “Given the level of aggregate spending and dividing it by even more people who are actually in the country shows just how restrained consumer spending has been.”

The RBNZ board also noted employment had risen above its maximum sustainable level, despite the high level of immigration. Orr explained data suggested labour conditions had improved and a shortage of manpower was no longer constraining activity. “The number one problem is actually demand,” he added.

The Governor said spending found in the most recent government budget would likely not be a major source of inflation and would reduce over the next few years. “Government consumption… is declining as a proportion of GDP," he commented. “It's come from a very high level of Covid support and it's come off significantly and that is where we get the contractionary impact of fiscal policy on overall aggregate demand.”

In its statement, the board noted, while fiscal policy will be contractionary on demand, it will be less so than assumed in February.

FUTURE FACTORS

The Board said it would monitor household spending growth and continued moderation in global inflationary pressure.

The board will next review the OCR on July 12.