The RBNZ is likely to hold the OCR at 5.5% next week, but stronger-than-expected unemployment will prompt an update to models and more hawkish communications.
Tough rhetoric from the Reserve’s top brass earlier this year has helped push overnight index swaps markets to factor a 30% chance of a hike next week and at least one full 25bp increase by May, before a cut of the same magnitude by November. Market commentators and independent economists say cuts could occur by mid-year.
STRONG EMPLOYMENT
While unemployment increased 10 basis points to 4% over Q4 2023, (see chart) it missed the RBNZ’s forecasts by 20bp, which will force the Reserve to update its models when it releases its refreshed Monetary Policy Statement alongside next week’s decision.
Wages have also grown strongly, with average ordinary-time hourly earnings up 6.9% y/y in Q4. While the government recently announced only a 2% increase to the minimum wage from April 1, public sector workers have experienced solid wage growth, of 5.7%, according to the Public Service Commission Labour Cost Index report.
The strong labour market figures could spur the RBNZ to act more aggressively in future, should inflation fail to fall faster than forecasted. Its dual mandate was removed late last year. (See MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight)
MIXED CPI
Headline inflation fell 30bp faster than the Reserve’s forecasts over Q4 to 4.7% y/y. However, while tradable inflation declined more than expected, non-tradable inflation remained stubbornly high at 1.1% over Q4, 20bp higher than anticipated. Domestic sources, such as higher local-government charges and energy prices – largely immune to monetary policy – drove the growth.
SOFTER DATA
Still, former staffers tell MNI the New Zealand economy has weakened and will continue to do so over the coming months, necessitating a cut by mid-year. (See MNI INTERVIEW: RBNZ Could Cut Next Year - Ex Dep. Governor)
The staffers have pointed to GDP growth, which printed 1 percentage point lower in the September quarter than the RBNZ’s forecasts, noting momentum could continue to slow. The RBNZ will have a clearer idea of how fast headline inflation is falling by mid-year and whether GDP growth maintains its softer rate. Domestic non-tradable inflation should fall as economic activity slows, one former staffer told MNI.
Retail sales continued to fall over Q4, down 1.9% – the seventh consecutive quarterly fall – illustrating how higher rates have constrained household budgets. (See chart)
Governor Adrian Orr will hold a press conference immediately following the OCR decision and MPS' publication.