MNI: Sticky Core Inflation Seen Muddying RBNZ's Peak OCR Call

The Reserve Bank of New Zealand could lift its Official Cash Rate one-to-two more times this year from its 5.5% base thanks to sticky core and non-tradeable inflation and despite the central bank’s signal that the rate has peaked, ex-staffers and board members told MNI.

Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, said non-tradable inflation had printed uncomfortably high, which will give the Reserve reason to question its stance. “I can't predict what the [RBNZ] may do with the OCR, but my hunch would be that yesterday's results will slightly firm the view that it may be inclined to move one more time to raise the OCR by 25bp,” he told MNI.

New Zealand headline CPI continued to slow in the June quarter, printing at 6.0% y/y, down from the March quarter’s 6.7%, but higher than the market’s 5.9% expectation (see MNI BRIEF: NZ CPI Slows To 6% Y/Y). Trimmed mean measures of inflation remained high between 5.7-6% y/y compared to 5.9-6.1% recorded in Q1 (see chart).

Mortlock said the RBNZ’s next decision on Aug 16 will rest largely on the strength of consumer spending and business confidence over the coming weeks and months. He added the full impact of higher rates on mortgages had not yet bled through to consumers.

“I suspect that the economy will do a lot of work for the Reserve to bring inflation down because of that,” he noted. “The jury is still out as to whether the OCR has peaked and if those other factors will be enough to bring inflation down or whether [the RBNZ] may feel the need to move once, or maybe twice, more.”

Both the ANZ business and consumer sentiment reports will publish by the end of July.

LABOUR & IMMIGRATION

Following its May meeting, the RBNZ signaled the OCR had likely peaked at 5.5% while Paul Conway, the Reserve's chief economist, told MNI the rate would likely stay elevated at 5.5% for about 12 months (see MNI INTERVIEW: OCR At 5.5% Before Pause - Ex-RBNZ Deputy Gov).

Grant Spencer, adjunct professor at Victoria University of Wellington and former RBNZ deputy governor, said the Reserve would qualify this stance and its projections on economic data, particularly the ongoing strength in the labour market. While the RBNZ had lifted the OCR to restrictive levels, this had not yet weakened demand and activity to the extent anticipated in the Reserve’s forecasts, he added.

“The [RBNZ] needs to see some weakness in the labor market to get that shift,” he argued. Spencer said the RBNZ would question whether a further lift may be needed to reduce non-traded inflation pressures and may want to see successive quarters of negative GDP to achieve it.

Stats NZ will update its unemployment rate, currently at 3.4%, on Aug 2, however, signs are pointing to an already weakening market. A recent Recruitment, Consulting & Staffing Association Jobs Report showed Q2 online job postings 23.7% lower y/y and 10.8% down over the quarter (see chart).

“The main influence on non-traded inflation is labour costs and that’s been running strong,” Spencer noted. “The RBNZ must get labour cost inflation down, which then feeds into the core inflation measures.” He added the higher levels of immigration would help loosen the labour market in the short term, but will add to domestic demand later.

The RBNZ will pause its meeting schedule after the August decision, and will not meet again until November, following New Zealand’s general election in October.