New Zealand's central bank is expected to lift rates to the highest since 2015 as a tight jobs market, rising wages and corporate pricing intentions stoke inflation.
The Reserve Bank of New Zealand is expected to hike rates for an eighth consecutive meeting on Oct 5 after Governor Adrian Orr warned earlier last week that policymakers “still have some work to do”.
The Official Cash Rate is expected to be raised 50bps to 3.5%, the highest since early-2015, as the Bank seeks to return inflation to the midpoint of its 1-3% target band. CPI rose at a 7.3% y/y pace in the June quarter.
The accompanying statement is expected to reiterate many of the concerns cited in August’s hawkish Monetary Policy Statement (MPS) given that growth of 1.7% in the June quarter was broadly in-line with the Bank’s forecasts, inflation continues to stalk the economy, the jobs market remains tight, and wages are rising. The MPS said inflation was “too high” and labour “remains scarce”.
Governor Orr said on Sept 27 that the Bank’s tightening cycle was “very mature” and “well advanced”. However, he caveated these remarks by adding that policymakers “still have some work to do”, comments reflected in market pricing for a terminal rate of 4.75% in 2023. August’s MPS forecast an average 4.1% OCR in 2023. (See MNI BRIEF: RBNZ’s Orr Says Tightening Cycle “Very Mature”).
More than six weeks after the MPS, inflation pressures remain elevated. Firms’ pricing intentions are running at three times the 1992-2020 average, according to the monthly ANZ New Zealand Business Outlook survey. Around 68% of firms intend to raise prices over the next three months and inflation expectations are running at 6%.
The labour market remains tight and wages are rising. There was a 0.4% increase in monthly jobs filled in August, lifting the y/y rate to 2.3% from 2.2%. The employment sub-index of the BNZ- BusinessNZ Performance of Manufacturing Index rose to 53.6 in August, the highest since September 2021. Job ads remain elevated.
Complicating the Bank’s attempts to get inflation back within its 1-3% band is the weak NZ dollar, which is hovering near its lowest against the U.S. dollar since 2009. Exports rose 26% y/y in August, underwritten by an 89% y/y rise in dairy exports, according to Stats NZ.